Tax Management India. Com
                        Law and Practice: A Digital eBook ...

Category of Documents

TMI - Tax Management India. Com
Case Laws Acts Notifications Circulars Classification Forms Manuals SMS News Articles
Highlights
D. Forum
What's New

Share:      

        Home        
 

TMI Blog

Home List
← Previous Next →

2019 (10) TMI 352

..... ount & General reserves as mentioned in the proviso could not be equated with each other, in the manner, as suggested by Ld. AR by relying upon the letter of Department of Company Affairs. The said circular, in our considered opinion, would have limited applicability in the context of which it has been issued and designed to apply in certain specific situation only. The expression used in the proviso are quite clear which mandates the inclusion of only the general reserves and nothing else. As per doctrine of literal interpretation, when the wordings in the statute are clear, the same has to be given the full effect. Therefore, we are unable to accept the arguments raised by Ld. AR, in this regard. Our view is duly supported by the cited decision of the Tribunal rendered on identical set of facts and circumstances. The coordinate bench has confirmed the stand of learned first appellate authority in excluding the balances in Share premium account, Profit & Loss Account and special Reserve account while computing the general reserves. Nothing on record would suggest any change in facts or as to how the said ruling is not applicable to the facts of the case. Addition u/s 36(1) .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... nt. We are also not convinced with other arguments of Ld. AR that the deduction should be allowed as bad debts since the same would be governed by the requirements of Section 36(1)(vii) - I.T.A. No.5434/Mum/2011, I.T.A. No.5435/Mum/2011 - 4-10-2019 - Shri Mahavir Singh, JM And Shri Manoj Kumar Aggarwal, AM For the Assessee : Shri H.P. Mahajani- Ld. AR For the Revenue : Shri Anadi Varma - Ld. CIT-DR ORDER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. Aforesaid appeals for Assessment Years [AY] 2004-05 & 2005-06 are partially recalled matter since the appeals were disposed-off vide Tribunal order dated 09/10/2015. However, few issues have been recalled by the Tribunal, upon assessee s miscellaneous applications MA Nos. 248-249/Mum/2016 order dated 01/06/2018 and accordingly, the issues have come up for fresh hearing before the bench. ITA No. 5434/Mum/2011, AY 2004-05 2.1 As evident from Tribunal s order in MA No. 248/Mum/2011, the only point of determination for this AY is whether balance in Profit & Loss Account , which is not in the nature of any other reserve having specific objectives, should form part of general reserves or not for the purpose of proviso to Section 36(1)(v .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ur attention has been drawn to letter issued by Department of Company Affairs (department letter No. 3/1/80-CL-X dated 16/02/1982) wherein it has been clarified that surplus appearing in the Balance Sheet of the company is a part of free reserve as defined under the Company s (Acceptance of deposits) Rules, 1975. It has further been pleaded that the term free reserves is used inter-changeably with the expression General Reserve. In the above background, Ld. AR pleaded for inclusion of balance standing in the Profit & Loss Account as part of General Reserves for the purpose of computation under proviso to Section 36(1)(viii). Per Contra, Ld. CIT-DR, submitted that Reserves is an appropriation out of Profit & Loss Account and quite distinct from the expression General Reserves and therefore, the same would not be includible for the purpose of computation. It has been submitted that the issue stood squarely covered in assessee s favor by the decision of Bangalore Bench of Tribunal rendered in the case of Canfin Home Finance Ltd. V/s DCIT ITA No. 861/Bang/2010 order dated 24/01/2012, a copy of which has been placed on record. 2.4 We have carefully considered the rival submissio .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ds read as under: - 2. Without prejudice to ground 1, the learned CIT(A) erred in confirming the order passed by the AO restricting the deduction u/s 36(1)(viii) to ₹ 29 Crores as against the claim made by the assessee at ₹ 101 Crores. Among other, Id. CIT(A) erred in: - ….. (c) not accepting the appellants submission that all the items classified in the appellants balance sheet under the head reserves and surplus excepting special reserve created in terms of 36(1)(viii) should be considered as general reserves . He ought to have appreciated that there is no definition of general reserves in the proviso to section 36(1)(viii) or anywhere else in the income tax act and that the reference to the expression General reserves in plural is significant. (d) Without prejudice disallowance of ₹ 71.65 Crores confirmed by Ld. CIT(A) in AY 2005-06 includes ₹ 20.58 Cores disallowed u/s 36(1)(viii) in AY 2004-05 and to this extent there is double disallowance of ₹ 20.48 Crores. 4. The Learned CIT(A) erred confirming addition of interest of ₹ 7,37,92,296/- on non-performing assets under Section 43D of Income Tax Act read with Rule 6EB without appreciatin .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... AR since the creation and maintenance of special reserve was the decision of the assessee. The assessee could transfer / withdraw amounts to / from special reserve, from time to time, as per its own decision & convenience. The limit placed by proviso to Section 36(1)(viii) was to be seen with reference to indices standing in assessee s financial statements at year-end and the disallowance was to be worked out as per the proviso to Section 36(1)(viii) for each year separately. During the year, the assessee could transfer / withdraw any amounts from / to special reserve. Therefore, there is no force in the argument of double taxation as urged by Ld. AR before us. In our opinion, the disallowance was to be worked out for each year separately keeping in view the closing balances standing in relevant accounts in the financial statements. This ground is decided against the assessee. 4.1 Ground No.4 pertains to computations u/s 43D read with Rule 6EB. During assessment proceedings, it transpired that the assessee did not offer the interest income on debts which remained past due for 90 days as against the period of 180 days as prescribed in Rule 6EB of the Income Tax Rules, 1963. In d .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... in Section 43D read as under: - 43D. Notwithstanding anything to the contrary contained in any other provision of this Act,- (a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, 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 Reserve Bank of India in relation to such debts; (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 financial corporation or the State industrial investment corporation or the public company to its profit and loss account 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. Admittedly, the assessee is covered under clause (b). In terms of stated .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... onsideration, we find that the provisions of Rule 6EB were initially in tandem with NHB guidelines. However, with effect from 31/03/2005, there was a change in NHB guidelines which now prescribed that if a debt is overdue for a period of 90 days then income by way of interest shall be recognized only on receipt basis unless the assessee recognizes the same in its books of account. The assessee has followed NHB guidelines and accordingly, not recognized income on debts which remained NPA beyond a period of 90 days as against the period of 6 months as prescribed in Rule 6EB. Hence, there is a dichotomy between what the assessee has recognized as per NHB guidelines and what it ought to have recognized as per Rule 6EB. Therefore, the question posed before us is whether in the matter of revenue recognition, NHB guidelines would prevail over express provisions of Rule 6EB or the income has to be recognized strictly as per Rule 6EB. In the other words, whether any change in NHB guidelines would automatically bring about corresponding change in Rule 6EB? 4.5 We are unable to accept the assertion that NHB guidelines would bring automatic corresponding change in Rule 6EB since, in our consid .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ing authority has enacted Rule 6EB of the Rules. The rule so enacted originally was in conformity with the guidelines issued by NHB. The guidelines were revised by NHB in the year 2004 but the rule making authority did not think it fit to revise the rules to be in conformity with the revised guidelines. In our view it cannot be said that the guidelines of the NHB as and when they are revised have to be treated by implication incorporated in Rule 6EB of the Rules. NHB is not the rule making authority for the purposes of section 43D of the Act. The discretion is left to the rule making authority to follow or not follow the guidelines of NHB as and when they are revised. The purpose of classification of debts as bad and doubtful by the NHB and the purpose of not recognising interest income for the purposes of the Act, are different. The considerations that weigh with the relevant authorities are also different. Therefore, it cannot be said that the rule making authority under the Act has to automatically follow the guidelines of NHB as they exist from time to time. In that view of the matter, we cannot agree with the submission of the learned counsel for the assessee, that the guideli .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ed interest on advances considered doubtful of recovery, otherwise called sticky advances, by debiting the concerned parties but instead of carrying it to its profit and loss account credited the same to a separate account styled "Interest Suspense Account" as the principal amounts of these sticky advances themselves had become, not bad or irrecoverable but extremely doubtful of recovery. However, in its returns, the assessee disclosed such interest separately and claimed that the same was not taxable in its hands as income for the concerned years. The Hon'ble Supreme Court on the taxability of interest income on accrual basis held as follows: "(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act shoul .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... n the assessee's taxable income if the Income-tax Officer is satisfied that there is really little probability of the loans being repaid. It was considered desirable to extend this principle to banks which, instead of transferring the doubtful debts to a suspense account, credit the interest on such debts to that account provided the Income-tax Officer is satisfied that recovery is practically improbable." This circular was in force till June 20, 1978, when the Central Board of Direct Taxes issued a circular dated June 20, 1978, withdrawing with immediate effect the earlier circular of October 6, 1952. The reason for the withdrawal of the circular of 1952 was the decision of the Kerala High Court in State Bank of Travancore v. CIT [1977] 110 ITR 336 wherein a view was expressed that in such cases income would accrue under mercantile system of accounting. The Central Board of Direct Taxes, however, issued another circular of October 9, 1984, under which the Central Board of Direct Taxes decided that "interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest charged in an account where there has bee .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... w and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities. The question whether interest earned, on what have come to be known as "sticky" loans, can be consider .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 1984, does not appear to have been pointed out to the court. What was submitted before the court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged "in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility". The court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. The de .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... e case of State Bank of Travancore (supra) but only modifies the same insofar as a later circular which is benevolent had not been brought to the Hon'ble Courts notice. In that view of the matter, we agree with the submission of the learned D.R. that real income theory would be relevant but would have no application so as to defeat the provisions of the Act. In our view provisions of section 43D lay down the limits up to which interest income of bad and doubtful debts in the case of public companies need not be recognised as income, in a case where assessee follows mercantile system of accounting. By implication it also lays down that any claim that interest income as not having accrued over and above the limits laid down by the Rules, should not be accepted. The claim of the assessee in our view is therefore contrary to the provisions of section 43D and the claim of the assessee based on real income theory and there being no real accrual of income cannot be accepted. 21. That leaves us with the decision of the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) and the Hon'ble Madras High Court in the case of Elgi Finance Ltd. (supra). In the case .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... sion for bad debt was not a permissible deduction under the Act, the same was held to be not allowable. The "real income" referred to by the Hon'ble Supreme Court in its judgment in paras 35 to 39 is in the context of profits arrived at on commercial principles subject to the provisions of the Act. The provisions of section 43D lay down the limits up to which interest income of bad and doubtful debts in the case of public companies need not be recognised as income, in a case where assessee follows mercantile system of accounting. By implication it also lays down that any claim that interest income as not having accrued over and above the limits laid down by the Rules, should not be accepted. The claim of the assessee in our view is therefore contrary to the provisions of section 43D and cannot therefore the claim of the assessee based on real income theory and there being no real accrual of income cannot be accepted. Thus the decision of the Hon'ble Delhi High Court and the Madras High Court will not be applicable to the facts of the present case. Rather the decision of the Hon'ble Supreme Court in the case of Southern Technologies (supra) alone will apply. We .....

X X X X X X X

Full Text of the Document

X X X X X X X

 

 

← Previous Next →

 

 

|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || Database || Members || Refer Us ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.
|| Blog || Site Map - Recent || Site Map ||