2015 (4) TMI 1203 - HC - Income Tax

Court rules provision for Non-Performing Assets not deductible under Income-tax Act

The High Court of Calcutta ruled against the allowability of a provision for Non-Performing Assets (NPA) as a deduction under the Income-tax Act, 1961. ... Allowable deduction on provision for NPA(Non Performing Assets) - whether claim of the assessee did not qualify under Explanation below section 36(1)(vii) to the effect that a provision will not amount to writing off? - Held that:- As decided in Southern Technologies Ltd. Vs. Joint Commissioner of Income-Tax [2010 (1) TMI 5 - SUPREME COURT OF INDIA] Section 36(1) (viia) provides for a deduction not only in respect of 'written off' bad debt but in case of banks it extends the allowance also to any Provision for bad and doubtful debts made by banks which incentive is not given to NBFCs - even in the case of banks the Provision for NPA has to be added back and only after such add back that deduction under Section 36(1) (viia) can be claimed by the banks - that neither Section 36(1)(viia) nor Section 43D violates Article 14. We further hold that the test of 'intelligible differentia' stands complied with and hence we reject the challenge - Provision for possible loss are only notional for purposes of disclosure, hence, they cannot be made an excuse for claiming deduction under the IT Act, hence, 'add back'. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the Income-tax Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions 1998 and the Income-tax Act operate in different fields. - Decided in favour of the revenue Issues:1. Allowability of provision for NPA as a deduction under Income-tax Act, 1961.Analysis:The judgment by the High Court of Calcutta pertains to the allowability of a provision for Non-Performing Assets (NPA) as a deduction under the Income-tax Act, 1961. The court considered the question of whether the Income-tax Appellate Tribunal was correct in allowing a provision of Rs. 1,36,97,996 for NPA made by the assessee as a deduction from its income. The issue revolved around whether the claim qualified under the Explanation below section 36(1)(vii) of the Income-tax Act, which states that a provision will not amount to writing off. The court analyzed the case in light of the guidelines of the Reserve Bank of India (RBI) and the relevant legal provisions.In the judgment, the court referred to a previous case, Southern Technologies Ltd. Vs. Joint Commissioner of Income-Tax, where the Supreme Court held that RBI Directions, 1998, do not override the provisions of the Income-tax Act. The court emphasized that the nature of the transaction must be examined to determine the allowability of expenses or losses, regardless of how they are presented in financial statements. The court highlighted that the RBI Directions and the Income-tax Act operate in different fields, and the authority under the Income-tax Act is not bound by the presentation of expenses/losses in financial statements.Based on the analysis and the precedent set by the Supreme Court, the High Court of Calcutta answered the question in the negative, in favor of the revenue. The court concluded that the provision for NPA made by the assessee was not allowable as a deduction under the Income-tax Act. Consequently, the appeal was admitted and allowed in favor of the revenue. The judgment provides clarity on the interpretation of provisions related to NPA deductions and underscores the importance of examining the nature of transactions for tax purposes, independent of accounting practices or RBI guidelines.