TaxTMI 
TaxTMI 
2003 (3) TMI 280
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....1934 when the matter of granting Registration is still pending with Reserve Bank of India. 2. The Ld. CIT(A) has erred in law and on facts in confirming the order of Assessing Officer at pages 3 and 4 that the directions of RBI on prudential norms of income recognition is not applicable to the appellant company thereby (1) Lease rental Rs. 29,56,968 Interest on lCD's Rs. 50,34,796 (2) Bill discounting charges not Rs. 96,61,901 realized over six months -----------------  ....
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.... section 45JA, where NBFCs are required to follow such norms for recognition of income as a mandate on the assessee and that is also found complied with the Notification No. 69(E) dated 25-1-1996 issued by CBDT reported in 218 ITR. If this is understood then the addition made by Assessing Officer of Rs. 1,76,53,665 is to be deleted. 7. The registration under the Reserve Bank of India Act, 1934 under section 45-IA is pending as the Central Government by its order sent it back to RBI duly set aside for re-consideration which is pending with Reserve Bank of India in terms of sub-section (7) and empower to carryon business as NBFC by virtue of proviso to sub-section (2) of section 45-IA. 8. The Ld. CIT(A) should have accepted that the disallowance of Rs. 19,802 which is 10 per cent of the repair and maintenance and balance of Rs. 21,044 should have been allowed out of the repair and maintenance of Rs. 1,98,019. 9. The Ld. CIT(A) should have allowed the bad debts written off entirely as claimed by the assessee of Rs. 23,68,314. 10. The bad debts of Rs. 23,12.412 should have been allowed by virtue of section 36(2) of the Income-tax Act, 1961 where the Income-tax Act after the....
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.... system or mercantile system of accounting regularly employed by it and the assessee does not have any choice to follow certain items on the mercantile system and other items on cash system or realization basis. The Assessing Officer was further of the view that even prior to the amendment, the assessee had either to follow cash or mercantile system and there was no system to adopt a hybrid system. Accordingly, in the light of this view, the plea of the assessee that they have adopted a different accounting system i.e. NBFCs providential norms (Reserve Bank directions) issued vide notification No. DFC 119/DG/SPT-98 dated 31-1-1998 was not accepted by the Assessing Officer, taking note of the fact that the company has not been registered as non-banking financial institution with the Reserve Bank of India which fact was evidenced from the auditors' report dated 2-9-1998 which was enclosed as Annexure 'A' to the assessment order. The auditors mentioned vide paragraph 2 as under: "...We report that the company has applied for registration with Reserve Bank ofIndiaas a non-banking Financial Institution company which is pending as on date...." 3.5 Thus, in view of the fact that in ....
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....of section 45-IA of RBI Act, 1934 to enable our company to carry on the business of non-banking financial institution." 4.3 Reliance was also placed upon sub-section (1) of section 45-1A of the RBI Act which reads as under: "(1) Notwithstanding anything contained in this Chapter or in any law for the time being in force, no non-banking financial company shall commence or carry on the business of a non-banking financial institution without-- (a) obtaining a certificate of registration issued under this Chapter; and (b) having the net owned fund of twenty five lakh rupees or such other amount, not exceeding two hundred lakhs, as the bank may, by notification in the Official Gazette, specify." 4.4 On a perusal of the above, the CIT(A) came to the conclusion that a non-banking financial institution shall not commence or carryon business of a non-banking financial company unless a certificate of registration is issued to it. He further took into consideration that proviso to subsection (2) states that any non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 shall make an application for registration to the bank ....
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....ns were to be made by existing companies before8th July, 1997. It was further stated that the company had made the application on16th June, 1997. Accordingly, since the application was still pending, the Assessing Officer's contention that NBFC Prudential Norms (Reserve Bank) Directions, 1998 do not apply to this company is erroneous. 4.8 The submissions were also made that according to the accounting standards notified by the Central Government under section 145(2) under sub-sections (1) and (2), it requires both significant Accounting Policy to be adopted and disclosed in the preparation of financial statements all in one place and only under clause (3), the changes in the accounting policy which are material and have to be disclosed each year giving the impact of the same. It was further stated that apart from this, certain terms have been defined and even the term accrual has been defined in a broad way. The contention was put forth that "accrual" refers to total income assumption that revenues and costs are accrued i.e. recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate....
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....145(2) of the Act because of non obstante clause appearing in section 45Q of RBI Act, 1934. 4.14 The CIT(A) took note of the fact that originally Chapter IIIB did not contain the provisions of section 45JA which had been inserted by the RBI (Amendment) Act, 1997 with effect from9-1-1997. With reference to the said section, it was observed by him that it empowers Reserve Bank ofIndiato determine policy and issue directions. The bank may issue directions in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in a manner prejudicial to the interest of the non-banking financial company relating to income recognition, accounting standards, making proper provisions for bad and doubtful debts etc. Accordingly, he was of the view that the directions of the RBI known as NBFC Prudential Norms (Reserve Bank) Directions, 1998 have been issued under delegated legislation were not relevant. He took into consideration the decision of theApex Courtrendered in Rajnarain Singh v. Chairman, Patna Administration Committee AIR 1954 SC 569 at pages 573 and 574. Thus, the directions given....
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....40 to 46 in the paperbook filed before us. Our attention was invited to the letter dated23-7-2001from the Government of India, Ministry of Finance included at pages 47 to 49 wherein the order of the appellate authority under the relevant Act has been enclosed. Referring to the said order at page 49 of the paperbook, it was reiterated that the RBI was directed to reconsider the case of the assessee and the assessee was directed to furnish whatever further information or documents required by the RBI for reconsideration. In this background, in the course of the hearing, it was brought to our notice that the registration had been granted by the RBI. A photocopy of the same was filed before us. As per the said document, the RBI covering letter dated29-11-2002accompanied with the registration certificate issued by the RBI on29-11-2002vide No. B-14.02759, Regional Office has in exercise of its powers conferred on the RBI by section 45-IA of the RBI Act, 1934 granted certificate of registration to the assessee. Accordingly, it was contended that the registration issued is now settled and since the pending application has been disposed of favourably, the registration having been granted to....
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....I guidelines are relevant. It was further submitted that the reliance placed upon by the CIT(A) on the case of Initiative and Referendum Act [1919] AC 935 P. 945 and Rajnarain Singh's case was misplaced. It was further stated that the reliance on section 43D substituted by Finance Act, 1999 with effect from 1-4-2000 was also misplaced which is in respect of public financial institutions, scheduled banks and is not applicable to non-banking financial companies. 5.8 It was argued that even previously prior to the introduction of the above section, the RBI as an Apex Bank has been issuing circulars as prudential norms as NBFCs. It was also brought to the notice of the Bench that the assessee has been carrying on the business of NBFCs right from beginning i.e. about four years and in all the years, the revenue had accepted the accounts prepared and filed with the Income-tax Department in accordance with the prudential norms which were existing in those days. The present prudential norms issued by the RBI vide notification dated2-1-1998, it was contended, have been included in pages 10 and 22 of paperbook 1 and the guidelines dated30-6-1994which were previously applicable to non-bank....
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....efinition of "Non-performing assets" at page 23 was specifically referred to. 6.2 It was further contended that the assessee itself is not applying the guidelines. It was put to him by the Bench that the CIT(A) has not considered this aspect at all. Accordingly, the arguments were confined to the legal issues involved. It was vehemently contended by him that the tax authorities were correct in deciding that the issue has to be decided by the basis of Income-tax Act and not on the basis of the RBI Act. The contention was that delegated legislation cannot override substantive legislation i.e. the Income-tax Act. Reliance was placed upon Assam Co. Ltd. v. State ofAssam[2001] 248 ITR 567 (SC). Attention was also invited to section 145 of the Act and it was reiterated that the said section shall prevail over sections 45Q, 45JA and 45-IA of the RBI Act. As such, reliance placed upon by the assessee on the prudential norms is not justified. It was contended that section 145 under the special enactment is the only section which is to be considered and has been considered by the tax authorities. 6.3 On the aspect of accrual of income, reliance was placed upon Babulal Narottamdas v. CI....
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.... peculiar facts and circumstances of the case, the issue is to be decided as per the provisions of the Income-tax Act or as per the Reserve Bank of India Act, 1934. 7.2 It may be stated right at the outset that before the Assessing Officer and the CIT(A), the undisputed fact was that the registration required for a non-banking financial company in terms of section 45-IA(1) of the RBI Act was not available with the assessee. In fact, the registration application moved by the assessee was admittedly rejected on account of non-representation/inadequate representation. It was also an admitted fact that in terms of section 45-IA(7) of the RBI Act, the assessee moved the Central Government against the rejection of the assessee's application for certificate of registration within the requisite time. There is no dispute over the issue that for granting reasonable opportunity of being heard to the assessee, the assessee's petition for registration was restored back to the RBI by the concerned authority with the direction to reconsider the application of the assessee. Thus, the fact remains that on the date of filing of the return and on the date the CIT(A) considered the appeal of the as....
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....of registration and net owned fund. Sub-clause (1) of this section states that no non-banking financial company shall commence or carryon the business of a non-banking financial institution without (a) obtaining a certificate of registration issued under this Chapter; and (b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the Official Gazette, specify. There is no dispute over the issue that as far as the requirement of clause (b) of section 45-IA sub-clause (1) is concerned, there is no dispute. The dispute revolves around the fact that the certificate of registration was not available with the assessee as the assessee's petition moved within time was pending. Subsequently, on account of inadequate representation/non-representation, it was dismissed which ultimately was restored and set aside for reconsideration by the concerned Appellate Authority to the RBI which ultimately granted Registration. 7.8 Sub-section (2) of section 45-IA mandates that every non-banking financial company shall make an application for registration to the bank in such form as the bank may specify. It....
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....o be pertinent to reproduce section 45JA of the RBI Act:-- "Power to Bank to determine policy and issue directions.--(1) If the Bank is satisfied that, in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the non-banking financial company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any of the non-banking financial companies relating to income recognition, accounting standards, making of proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off balance-sheet items and also relating to deployment of funds by a non-banking financial company or a class of non-banking financial companies or non-banking financial companies generally, as the case may be, and such non-banking financia] companies shall be bound to follow the policy so determined and the direction so issued. (2) Without prejudice to the generality of the powers vested under sub....
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....s generally, as the case may be, and such non-banking financial companies shall be bound to follow the policy so determined and the direction so issued. Accordingly, it is seen that wide and vast powers have been given by the Legislature to the RBI to govern a specified class of companies i.e., non-banking financial companies whose functioning is monitored by the Reserve Bank of India by way of granting them certificate of registration under section 45-IA. The purpose for which such vast powers have been given are incorporated in the preamble of the Act and specifically included in the section for determining the policy of the government. The powers vested in the Apex Bank by the Legislature for determining policy by the experts monitoring the monetary, economic and fiscal policy of the nation for a specific purpose is a conscious and deliberate decision of the Legislature and, thus, when in clear and articulate language they have specifically enumerated any other Act, then the overriding mandate of the section cannot be ignored. Accordingly, we are of the view that ignoring the provisions of Chapter IIIB of the RBI Act and the Prudential Norms issued by them from time to time in e....
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....of the view that the tax authorities were also not correct in coming to the conclusion that the Income-tax Act is a special Act and RBI Act is a general Act as the position for the purposes of the issue at hand is vice versa. It may also be emphasized at this juncture that the RBI Act was incorporated for a specific purpose and section 45Q of the said Act categorically brings out the intention of the Legislature inasmuch as it states that Chapter IIIB shall override for all intents and purposes. Anything inconsistent with any other Act for the time being in force or any instrument having effect by virtue of any such law shall fade in oblivion on account of this fact. Section 45-IA regulates and monitors the non-banking financial companies and under section 45JA, it determined the policies and issued directions to a class of companies which are governed by Chapter IIIB. In this background, on account of the reasons given above, we are inclined to delete the addition made by the Assessing Officer disregarding the prudential norms. As such, ground Nos. 2, 3 and 5 raised by the assessee are allowed. Ground Nos. 1 and 7 which refers to the issue of Registration is pending requires no ad....
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....ity does any of the above, the rule becomes ultra vires the Act. While interpreting a particular provision of a statute, courts should bear in mind the object and scheme of the entire Act. The particular provision cannot be considered or interpreted in isolation so as to give room for conflict inter se between the provisions of the same Act. Courts should also bear in mind that while interpreting a provision of the Act an interpretation leading to the provision becoming ultra vires should be avoided." 7.18 The principle laid down in the judgment is well-settled and there is no dispute over the same. However, in the facts as they stand, we are unable to see how the said decision affects the issue at hand. It may be pertinent to briefly touch on relevant facts namely here both the Acts are Acts of Parliament unlike the facts in the case referred to where one of the Acts was a State Act. To re-capitulate the case of the Revenue has been that the Income-tax Act being a Central Act has to prevail. As such, prudential norms being delegated legislation do not have any role. The principle enunciated in the said judgment vis-a-vis the facts of the case does not help the Revenue as here, ....
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....now as the Registration is available and thus in the facts as they stand, this decision too does not advance the case of the Revenue. 7.20 Reliance has also been placed upon Babulal Narottamdas's case on the aspect of accrual of income. A careful perusal of this decision also shows that it does not advance the case of the Revenue in any manner. Briefly, the facts in this case were that the assessee was a managing agent of the company. A resolution was passed by the Company in July, 1949 for payment of special additional remuneration at a certain rate which was challenged by some shareholders in a representative suit in the civil court. Temporary injunction granted by the trial court was vacated on the company assuring that it will not pay the remuneration until disposal of the suit. The trial court decreed the suit but on appeal, the High Court, by its judgment dated25-11-1955, upheld the validity of the resolution. In the meantime, the company debited the annual sum to its profit and loss account for the calendar year 1949 and for later years as a contingent liability. The assessee in the meantime died in 1952 and the sum of Rs. 58,000 odd was received by his heirs in 1956. The....
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....8.3 In appeal before the first appellate authority, the arguments of the assessee were rejected relying on the fact that in principle, the assessee has agreed that the vehicles were used for private purposes and reliance was placed upon Kanthimathy Plantations (P.) Ltd. v. State of Tamil Nadu [1995] 215 ITR 203 (Mad.). 8.4 Still aggrieved, the assessee is in appeal before us. The contention as per the ground raised is that the disallowance of Rs. 19,802 which is 10% of the amount incurred on repairs and maintenance and balance of Rs. 21,044 should have been allowed out of repair and maintenance of Rs.1,98,019. Our attention was invited to the fact that the CIT(A) in the impugned order at page 9 para 5.3. 8.5 Learned DR, on the other hand, placed reliance on the impugned order. 8.6 Having heard the rival submissions and perused the material placed on our files, we are of the view that in the peculiar facts of the case where the assessee is himself agreeing to the personal use of the vehicles before the tax authorities, the disallowance for non-business purposes is justified. Accordingly, ground No.8 is rejected. 9.1 Ground Nos. 9 and 10 pertain to the claim of the assess....
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....ff. It is submitted by the Ld. A.R. of the appellant that the requirement of law for write off has no such specific treatment for non-allowance and what is required under the law has been complied with." 9.4 After considering the submissions, the CIT(A) dismissed the assessee's contention vide paragraph 6.5 and confirmed the assessment order. 9.5 Still aggrieved, the assessee is in appeal before us. The learned AR reiterated the submissions made before the tax authorities. It was further contended that requirements of law were fulfilled. As such, the disallowance of bad debts claimed could not have been made. 9.6 Learned DR, on the other hand, invited our attention to paragraph 6.5 and placed heavy reliance on the same. 9.7 Having heard the rival submissions and perused the material placed on our files, we are of the view that in the specific and peculiar facts of the case, no interference is called for. It is seen that the first appellate authority in paragraph 6.5 rejected the claim of the assessee on account of the following: "6.5 I have considered the submissions made by the Ld. AR. of the appellant. According to the assessee the amounts written off were offered ....