Assessee's Appeal Dismissed: Profit & Loss not "General Reserves" under Income Tax Act

The Tribunal dismissed the assessee's appeal on the grounds related to the Profit & Loss Account not being considered as part of "general reserves" under the Income Tax Act. The Tribunal also rejected the claim of double disallowance for different assessment years and upheld the computation of interest on non-performing assets based on Rule 6EB, despite arguments regarding NHB guidelines. Overall, the Tribunal partly allowed both appeals, with the order pronounced on 4th October 2019.

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Issues Involved:
1. Whether the balance in the Profit & Loss Account should be considered as part of "general reserves" under the proviso to Section 36(1)(viii) of the Income Tax Act.
2. Determination of the expression "general reserves" for AY 2005-06.
3. Alleged double disallowance of Rs. 20.48 Crores under Section 36(1)(viii) for AY 2005-06.
4. Computation of interest on non-performing assets under Section 43D read with Rule 6EB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Profit & Loss Account as Part of General Reserves (AY 2004-05):

The primary issue for AY 2004-05 was whether the balance in the Profit & Loss Account should be included in the "general reserves" for the purpose of the proviso to Section 36(1)(viii). The assessee argued that all items classified under "Reserve & Surplus" except the Special Reserve should be considered as "General Reserves". The Tribunal noted that the term "General Reserve" is not explicitly defined in the Income Tax Act, but the expression "General Reserves" in plural indicates a specific meaning. The Tribunal concluded that reserves are an appropriation out of the Profit & Loss Account and cannot be equated with General Reserves. This interpretation was supported by the decision of the Bangalore Bench in the case of Canfin Home Finance Ltd. v/s DCIT. Consequently, the Tribunal dismissed the assessee's appeal on this ground.

2. Determination of General Reserves (AY 2005-06):

For AY 2005-06, the Tribunal noted that the issue of determining the expression "general reserves" was identical to AY 2004-05. Therefore, the Tribunal's adjudication for AY 2004-05 was applied mutatis mutandis to AY 2005-06, and this ground was decided against the assessee.

3. Alleged Double Disallowance (AY 2005-06):

The assessee contended that the disallowance of Rs. 71.65 Crores for AY 2005-06 included Rs. 20.48 Crores disallowed in AY 2004-05, resulting in double disallowance. The Tribunal found that the creation and maintenance of the special reserve was the assessee's decision, and the disallowance was to be worked out for each year separately based on the closing balances in the financial statements. Therefore, the Tribunal dismissed this ground, stating that there was no double taxation.

4. Computation of Interest on Non-Performing Assets (Section 43D read with Rule 6EB):

The assessee did not offer interest income on debts past due for 90 days, arguing that NHB guidelines should prevail over Rule 6EB, which prescribes a period of 180 days. The Tribunal noted that Rule 6EB, as per the Income Tax (Thirtieth Amendment) Rules, 1999, remained unchanged despite amendments to NHB guidelines. The Tribunal concluded that NHB guidelines do not automatically bring about changes in Rule 6EB, as the rule-making authority has discretion. This interpretation was supported by the decision in GIC Housing Finance Ltd. v/s ADIT. The Tribunal upheld the addition made by the AO, dismissing the assessee's appeal on this ground. However, the Tribunal acknowledged that some income might have been recognized in subsequent years upon receipt, but this remained unquantified.

Conclusion:

All grounds in both years were dismissed, and both appeals were partly allowed. The order was pronounced in the open court on 04th October 2019.

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