2017 (7) TMI 144 - HC - Income Tax

Court dismisses appeals by HUDCO in tax case, upholding Revenue's position on NPA interest income.

Housing And Urban Development Corporation Limited Versus Additional Commissioner Of Income Tax

Housing And Urban Development Corporation Limited Versus Additional Commissioner Of Income Tax - [2017] 396 ITR 667 Issues Involved:1. Entitlement to deduction on account of de-recognition of interest accruing upon Non-Performing Assets (NPAs).2. Applicability of Rule 6EB of the Income Tax Rules, 1962 versus guidelines issued by the National Housing Bank (NHB).Detailed Analysis:1. Entitlement to Deduction on Account of De-recognition of Interest Accruing upon NPAs:The primary issue in these appeals by HUDCO concerns the treatment of interest corresponding to bad and doubtful debts, known as NPAs. HUDCO claimed deductions based on NHB guidelines, which classified debts as NPAs if interest was not received for more than 90 days. The Assessing Officer (AO) and subsequent appellate authorities, however, relied on Section 43D of the Income Tax Act and Rule 6EB of the Income Tax Rules, which required a debt to be classified as an NPA if interest was due for more than six months. Consequently, the AO disallowed 50% of the claimed de-recognition of interest, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT).2. Applicability of Rule 6EB versus NHB Guidelines:HUDCO argued that its accounts were maintained as per NHB directions, which should override other laws concerning income recognition due to Section 36 of the NHB Act. The contention was that the NHB guidelines mandated the classification of NPAs if interest was not received for more than 90 days, and this should be considered for tax purposes. However, the court noted that Section 43D(b) of the Income Tax Act, read with Rule 6EB, governs the recognition of interest income for NPAs. The court emphasized that the NHB guidelines do not automatically amend Rule 6EB, as the guidelines are to be considered ('having regard to') but not necessarily incorporated into the Rules.Legal Reasoning and Conclusion:The court referred to several precedents to support its decision. It highlighted the Supreme Court's interpretation of 'having regard to' in Rajesh Kumar v. DCIT, indicating that the guidelines need not be identical to the Rules. The court also cited Southern Technologies Ltd. v. Asstt. CIT, which established that the RBI Act does not override the Income Tax Act. Similarly, in CIT v. Vasisth Chay Vyapar Ltd., it was held that RBI guidelines do not determine taxable income under the Income Tax Act.The court concluded that Section 43D and Rule 6EB form a complete code for the recognition of interest income on NPAs, and there is no automatic incorporation of NHB guidelines into Rule 6EB. The real income principle does not apply to Section 43D, and the distinction between deductions under the Income Tax Act and prudential norms under the NHB Act must be maintained.Judgment:The court answered the framed question in the negative, favoring the Revenue and against the Assessee, thereby dismissing the appeals without any order as to costs.