2020 (6) TMI 404 - AT - Income Tax

Tribunal Disallows NPA Provision for NBFCs, Follows Supreme Court Guidelines, Overturning Prior Deduction Allowance.

DCIT, Circle-6 (1), Kolkata Versus CFL Capital Financial Services Ltd.

DCIT, Circle-6 (1), Kolkata Versus CFL Capital Financial Services Ltd. - TMI Issues Involved:1. Deletion of disallowance under section 36(1)(viia) for NBFCs.2. Consistency in the method of accounting and double deduction.Detailed Analysis:1. Deletion of Disallowance under Section 36(1)(viia) for NBFCs:The primary issue revolves around whether the provision for non-performing assets (NPA) made by a Non-Banking Financial Company (NBFC) is allowable as a deduction under section 36(1)(viia) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the deduction, arguing that section 36(1)(viia) applies only to scheduled banks and not to NBFCs. The AO cited Supreme Court decisions in Jyoti Ltd. and State Bank of Patiala, which held that provisions can only be allowed when the liability has crystallized. Since the provision for NPA was made based on an assumption of future bad debts, it was considered unascertained and thus not allowable.The Commissioner of Income Tax (Appeals) [CIT(A)] overturned the AO's decision, citing previous decisions by the Income Tax Appellate Tribunal (ITAT) in the assessee's favor for earlier assessment years (1997-98, 1998-99, 1999-2000). The CIT(A) also referenced the ITAT's decision in ACIT vs. Spot Light Vanijya Ltd., which allowed the provision for NPA as a deduction. The CIT(A) noted that the Supreme Court's decision in State Bank of Patiala was specific to scheduled banks and did not apply to NBFCs, which lack a specific provision under section 36(1)(viia).2. Consistency in the Method of Accounting and Double Deduction:Another issue raised by the Revenue was the consistency in the method of accounting. The CIT(A) had held that if a particular method of accounting is consistently followed by the assessee, it should not be disturbed for a single year. The Revenue argued that this allowed the assessee to claim double deductions through capital recovery and full depreciation without adjusting the written-down value.Tribunal's Decision:The ITAT reviewed the CIT(A)'s decision and the submissions made by the Revenue. The Tribunal noted that the CIT(A) had relied on previous ITAT decisions, which had consistently allowed the provision for NPA as a deduction for NBFCs. However, the Tribunal also considered a recent judgment in the case of SREI Infrastructure Finance Ltd., where the ITAT disallowed the provision for NPA following the Supreme Court's decision in Southern Technologies Ltd. vs. JCIT. The Supreme Court had ruled that provisions for NPA made under RBI guidelines do not constitute an expense under section 36(1)(vii) and are not allowable under section 37(1) of the Act.Respecting the Supreme Court's decision, the ITAT concluded that the provision for NPA is not allowable for NBFCs. Consequently, the Tribunal allowed the Revenue's appeal, overturning the CIT(A)'s decision and disallowing the provision for NPA.Additional Considerations:The Tribunal noted the delay in pronouncing the order due to the COVID-19 pandemic and lockdown, referencing a Mumbai Tribunal decision to exclude the lockdown period from the 90-day limit for pronouncing orders.Conclusion:The ITAT allowed the Revenue's appeal, disallowing the provision for NPA for NBFCs based on the Supreme Court's ruling in Southern Technologies Ltd. vs. JCIT. The Tribunal emphasized the binding nature of the Supreme Court's judgment, ensuring consistency in the application of the law.