2012 (9) TMI 373 - SC - Income Tax

Supreme Court Rules Contingent Deposit as Taxable Income for Non-Banking Finance Companies Under Income Tax Act 1961.

The SC dismissed the civil appeal of the assessee, a Non-Banking Finance Company, regarding the treatment of a contingent deposit as income under the ... Non entitlement to deduction of the 'provision' made in respect of irrecoverable Non Performing Assets - Held that:- Decided in favour of Revenue as decided in M/s Southern Technologies Ltd. versus Joint Commnr. of Income Tax, Coimbatore [2010 (1) TMI 5 - SUPREME COURT OF INDIA] 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' - against assessee. Contingent deposits from the leasing/hire purchase customers with a view to protect themselves from sales tax liability. - ITAT treated it as assessee's income - Held that:- It is now well settled that in determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt - As in the present case, the assessee received Rs. 36,47,585/- in the assessment year 1998-99 and as per his own statement in Court the said sum was not kept in a separate interest bearing bank account but it formed part of the business turnover. - In view of the said statement no reason to interfere with the impugned judgment constituting the addition to the income. - The said amount was part of the turnover. The said amount was collected from the customers. The said amount was collected towards sales tax liability - against assessee. Decision in the case of Bazpur Co-operative Sugar Factory Ltd. (1988 (5) TMI 4 - SUPREME COURT) distinguished. Issues Involved:1. Treatment of provision for Non Performing Assets2. Allowability of provision for Non Performing Assets as bad debt or business loss3. Treatment of contingent deposit as income under Section 28 of the Income Tax Act, 1961Issue 1: Treatment of provision for Non Performing AssetsThe assessee, a Non Banking Finance Company, filed a civil appeal concerning the assessment year 1998-99, with the main issue being the deduction of the provision made for Non Performing Assets (NPAs) considered irrecoverable. The Appellate Tribunal had ruled against the appellant's entitlement to this deduction. The counsel for the assessee acknowledged that previous judgments favored the Department on this matter. Therefore, the Supreme Court did not delve into this issue further.Issue 2: Allowability of provision for Non Performing AssetsThe second issue revolved around whether the provision for NPAs, if not allowable as a bad debt, could be considered as a business loss. The Appellate Tribunal's decision was questioned by the appellant, but the counsel for the assessee referred to previous judgments that had already addressed and favored the Department's stance on this issue. Hence, the Supreme Court did not provide any additional ruling on this matter.Issue 3: Treatment of contingent deposit as incomeThe crucial question in this case was whether the amount of Rs. 36,47,585/- collected by the assessee as a contingent deposit should be treated as income under Section 28 of the Income Tax Act, 1961. The assessee argued that this collection was to safeguard against potential sales tax liabilities, and thus, should not be taxed as income in the year of receipt. The Supreme Court, however, analyzed the legal character of the transaction and found that the amount collected was part of the turnover and constituted income. The Court applied the substance over form test and concluded that the sum in question was indeed taxable. The judgment distinguished a previous case involving a cooperative society, emphasizing that the principle of mutuality did not apply in this scenario. Consequently, the Court dismissed the civil appeal of the assessee, affirming that the amount collected as a contingent deposit should be treated as income.In conclusion, the Supreme Court dismissed the civil appeal of the assessee concerning the treatment of the contingent deposit as income under the Income Tax Act, 1961. The Court's decision was based on the legal character of the transaction and the nature of the amount collected, which was deemed to be part of the turnover and thus taxable.