2023 (1) TMI 488 - HC - Income Tax

High Court affirms Tribunal's denial of deductions for NPA provisions, investment value diminution, and repossessed vehicle value.

M/s. Ashok Leyland Finance Limited, (A Division of M/s. Indus Ind Bank Ltd) Versus The Deputy Commissioner of Income Tax, Company Circle 1 (1), Chennai

M/s. Ashok Leyland Finance Limited, (A Division of M/s. Indus Ind Bank Ltd) Versus The Deputy Commissioner of Income Tax, Company Circle 1 (1), Chennai - ... Issues Involved:1. Deduction of provision for Non-Performing Assets (NPA).2. Deduction for diminution in the value of investments.3. Deduction for diminution in the value of repossessed vehicles.Issue-wise Detailed Analysis:1. Deduction of Provision for Non-Performing Assets (NPA):The appellant claimed a deduction of Rs.1,44,12,000/- for provisioning of NPAs based on RBI guidelines and a prior decision of the Income Tax Appellate Tribunal (ITAT), Chennai. However, conflicting views from other ITAT benches (e.g., ITAT Bombay in Rajasthan Bank case) and the Commissioner of Income Tax (Appeals) (CIT(A)) in M/s. First Leasing Company Ltd. case were noted. The Tribunal upheld the CIT(A)'s order, referencing the appellant's own case from prior years (I.T.A.No.181/Mds/2002 and I.T.A.No.131/05-06). Section 36(1)(viia) of the Income Tax Act, 1961, allows specific deductions for bad and doubtful debts, but the appellant, as a Non-Banking Financial Company (NBFC), could not claim beyond the statutory limit of 5% of total income. This view was supported by the High Court in T.N. Power Finance & Infrastructure Development Corporation Limited vs. Joint Commissioner of Income Tax. Thus, the substantial question of law was answered against the appellant.2. Deduction for Diminution in the Value of Investments:The appellant claimed Rs.53,98,000/- as a deduction for the diminution in the value of investments in two unlisted companies. The Tribunal dismissed this claim, relying on prior decisions in the appellant's own cases (I.T.A.No.181/Mds/2002 and I.T.A.No.131/05-06). The Supreme Court in Madhya Pradesh Co-Operative Bank Ltd. vs. Additional Commissioner of Income Tax held that government securities cannot be considered circulating capital or stock-in-trade. Similarly, investments in unlisted company shares are not circulating capital or stock-in-trade. Deductions must comply strictly with the Income Tax Act, 1961. Losses from investments arise only upon sale, not merely from diminished value. Thus, the question of law was answered against the appellant.3. Deduction for Diminution in the Value of Repossessed Vehicles:The appellant sought a deduction for Rs.4,18,63,000/- based on the diminution in the value of repossessed vehicles. The Tribunal found that the appellant reduced the value of receivables based on estimated market value at repossession, not actual sales. Section 36(1)(vii) of the Income Tax Act allows deductions for bad debts written off as irrecoverable, but the appellant did not write off these receivables as bad debts. The Tribunal noted that the RBI guidelines and Accounting Standards (AS 19) were not clearly followed or explained by the appellant. The Supreme Court in Vijaya Bank vs. Commissioner of Income Tax clarified that mere provisions for doubtful debts are insufficient for deductions without actual write-offs. The Tribunal concluded that estimated losses based on market value projections do not qualify for deductions unless provided by relevant accounting standards. Thus, the substantial question of law was answered against the appellant.Conclusion:The High Court dismissed the appeal, affirming the Tribunal's decisions on all substantial questions of law against the appellant. The deductions claimed for NPAs, diminution in investment value, and diminution in repossessed vehicle value were not allowable under the Income Tax Act, 1961. The assessment order was deemed erroneous and prejudicial to the revenue's interest.