TMI Blog2023 (1) TMI 488X X X X Extracts X X X X X X X X Extracts X X X X ..... erve Bank of India Act, 1934 (2 of 1934) as made applicable to Section 36(1) of the Income Tax Act, 1961. The expression non-banking financial company has the same meaning assigned to it in clause ( f ) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934). Provision for bad and doubtful debts made by a non-banking financial company cannot exceed five per cent of the total income computed before making any deduction under Section 36 Chapter VI-A of the Act. Therefore, the Appellant cannot claim deduction beyond the amount that is statutorily recognized. This view was affirmed by this Court in T.N.Power Finance Infrastructure Development Corporation Limited [ 2005 (10) TMI 38 - MADRAS HIGH COURT ] Therefore, the Substantial Question of Law is answered against the appellant. Diminution in value of repossessed stock of vehicles - HELD THAT:- The loss from the repossessed vehicles can be ascertained only after they are resold. Till such time, loss cannot be determined. Estimated loss based on the difference between the receivable and the projected market value would not entitle the appellant to reduce the value of the asset to reduce the market value unless p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law in holding that the appellant is not entitled to deduction of diminution in value of investments? iv. Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the loss computed by the appellant on account of diminution in value of repossessed vehicles is only a notional and unascertained loss and hence cannot be allowed as a deduction? 5. The factual background of the case indicates that the appellant had filed a return of income on 01.12.2003 for the Assessment Year 2003-2004, declaring a total taxable income of Rs.78,65,45,000/- under Section 139 of the Income Tax Act, 1961. 6. A notice under Section 143(2) of the Act was issued to the appellant on 24.12.2004. The assessment was completed on 24.03.2006 under Section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2003-2004. The total income of Rs.91,63,33,629/- was determined in the assessment order dated 24.03.2006. 7. Aggrieved by the order of the Assessing Officer dated 24.03.2006, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals) [hereinafter referred to as Appellate Commissioner ] on 24.04.2006 in I.T.A.No.176/2006-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain contingencies arise and therefore Government securities cannot be considered to be Circulating Capital or Stock-in-Trade . Thus, investment in shares of the unlisted companies cannot be considered as Circulating Capital or Stock-in- Trade . 15. The investments of the appellant assessee in two unlisted companies are not Stock-in-Trade . They are merely investments. Deductions are to be strictly in compliance with the provisions of the Income Tax Act, 1961. Loss in the value of investment will arise only when such shares are sold by the appellant. The appellant is therefore not entitled for deduction on account of alleged diminution in the value of investment due to the purported loss suffered by the said company on such investment of the appellant. Therefore, the Question of Law No.1 is answered against the appellant assessee. DEDUCTION ON ACCOUNT OF PROVISION FOR NONPERFORMING ASSETS (NPA): 16. An extent of Rs.1,44,12,000/- was claimed as deduction in terms of RBI Guidelines due to provisioning and on the basis of the decision of the Income Tax Appellate Tribunal, Chennai Bench in Overseas Sanmar Financial Ltd. Vs. Joint Commissioner of Income Tax , 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year: Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words five per cent , the words ten per cent had been substituted : Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head Profits and gains of business or profession. Explanation.- For the purposes of this sub-clause, relevant assessment years means the five consecutive assessment years commencing on or after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934); ( iii ) public financial institution shall have the meaning assigned to it in section 4Aof the Companies Act, 1956 (1 of 1956); ( iv ) State financial corporation means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); ( v ) State industrial investment corporation means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause ( viii ) of this sub-section; ( vi ) co-operative bank , primary agricultural credit society and primary co-operative agricultural and rural development bank shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P; ( vii ) non-banking financial company shall have the meaning assigned to it in clause ( f ) of section 45-I of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (4) of section 80P; ( e ) housing finance company means a public company formed or registered 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; ( f ) public company shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956); ( g ) infrastructure facility means- ( i ) an infrastructure facility as defined in the Explanation to clause ( i ) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed; ( ii ) an undertaking referred to in clause ( ii ) or clause ( iii ) or clause ( iv ) or clause ( vi ) of sub-section (4) of section 80-IA; and ( iii ) an undertaking referred to in sub-section (10) of section 80-IB; ( h ) long-term finance means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; 21. The Tribunal has upheld the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e vehicles were sold before the closes of the financial year, entries made towards diminution in the value were reversed on the actual loss arrived from the sale and suitable adjustments were made in the book. This method adopted by the appellant allowed it to reduce the value of the asset and thereby the income tax payable. 12. The appellant thus claimed a deduction under Section 36 of the Act based on the estimated market value it determined at the time of repossession. This deduction was sought to be denied. Income tax is payable on the income as defined in Section 2(24) of the Act. 13. Section 36(1)(vii) of the Act allows deduction of amount towards any bad debt or part thereof which is written off as irrecoverable in the books of accounts of the assessee for the previous year. Deduction is subject to Section 36(2) of the Act. Sub-Section (1)(vii) and (2) to Section 36 of the Act which are relevant for the purpose of this case are reproduced below:- Section 36 (1)(vii) Section 36(2) (1) The deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-section (6) of section 155 shall apply; v. where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub- section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provisions for bad and doubtful debts account made under that clause. 14. By Circular No.12/2016, dated 30.05.2016, the Income Tax Department clarified that claim for any debt or part thereof in any previous year, shall be admissible under Section 36(1)(vii) of the Act, if it is written off as irrecoverable in the Books of Accounts of the assessee for that previous year and it fulfils the conditions stipulated in Sub-Section (2) to Section 36 of the Act. 15. The above clarification was issued in the light of the decision of the Honourable Supreme Court in case of T.R.F. Ltd. Vs. Commissioner of Income Tax, Ranchi , (2010) 13 SCC 532, wherein, it was clarified that After 1.4.1989, for allowing deduction for the amount of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on lease or stock on hire under the Fixed Assets of Current Asset as the case may be. B) Valuation of assets may be done as per accounting standards of ICA!. 18. The above clarification does not clearly spell out the relevant Accounting Standard which is to be followed by a NBFC. The valuation has to be in accordance with the Accounting Standard (AS) 19 Accounting for Leases for all lease agreements (Financial Leases) executed on or after April 1, 2001. 19. Paragraphs 26 to 38 of the Accounting Standard (AS) 19 deals with leases in the Financial Statement of lessors. The appellant has not explained the same. 20. In Vijaya Bank Vs. Commissioner of Income Tax , (2010) 323 ITR 166, it was clarified that after the amendment to Section 36 of Act with effect from 01.04.1989, a distinct dichotomy has been brought. Consequently, a mere provision for bad debt is not sufficient to claim deduction unless there is a write-off in full or part. Explaining the concept, the Court gave an illustration. If an assessee debits an amount of doubtful debt to the Profit and Loss Account and credits the asset like sundry debtors account, it would constitut ..... 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