TaxTMI 
TaxTMI 
2007 (10) TMI 325
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing provision for non-performing assets (NPA). The assessee submitted that being an NBFC registered with the RBI, it has to follow the Prudential Norms as prescribed by the RBI from time to time and the deduction claimed in the P&L a/c on account of provision for NPA was in consonance with such guidelines issued by the RBI. As per the Prudential Norms, lease rental and hire purchase instalments which have become overdue for a period of 12 months or more have to be termed as NPA and the assessee has to create a provision for such NPA and debit it to the P&L a/c. The assessee relied on the decision of Chennai Bench of the Tribunal in the case of Overseas Sanmar Financial Ltd. vs. Jt. CIT (2004) 87 TTJ (Chennai) 556 : (2003) 86 ITD 602 (Chennai) wherein it has been held that provision for NPA made in consonance with the Prudential Norms of the RBI has to be allowed as deduction in computing income for the purpose of IT Act, 1961 also. 3. The AO, however, held that the assessee did not furnish a detailed calculation of provision for NPA claimed partywise as per RBI guidelines and therefore, the claim of the assessee was disallowed. 4. On appeal by the assessee, the CIT(A) held that i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or a non-scheduled bank or a co-operative bank or by financial institution or State financial corporation etc. for allowing provision for bad and doubtful debts as per sub-cl. (viia) of sub-s. (1) of s. 36. However, there is no provision made similarly for an NBFC even though both are governed by the regulatory directions of RBI. He further submitted that under s. 43D, entities referred in sub-cl. (viia) of sub-s. (1) of s. 36 shall be chargeable to tax in the previous year in which it has credited the income by way of interest in relation to such provision of bad or doubtful debts. Thus, no specific provision is made in regard to allowance of provision for bad or doubtful debts in case of an NBFC. He went on to submit that the appellant is one of the NBFC to which the Prudential Norms issued by the RBI applies. In Chapter III-B of RBI Act, 1934 (in short 'RBI Act'). the provisions relating to non-banking institutions receiving deposits and financial institutions are contained. As per provisions of s. 45H of RBI Act, Chapter III-B does not apply to the State Bank or banking company defined in Banking Regulation Act, 1949 or corresponding new bank. Under s. 45JA of RBI Act, the RBI ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gislation. Legislation instead of enacting the same itself, delegates that power and authority. The persons or authority making the rule are so doing as the delegate of the legislature. Whatever is by the delegate of the legislature is also the enactment of the legislation. 7.1 Sec. 45Q of the RBI Act contains a non obstante clause and anything inconsistent with the direction contained in Prudential Norms shall not have effect and the provision of Prudential Norms issued under the authority of RBI Act shall prevail. He further submitted that where there are two parallel provisions in different statutory enactments, the special provision shall prevail over the general provision. The IT Act, 1961 applies to all whereas RBI Act, 1934 applies to limited class like banks and NBFC. Thus, special provision shall have overriding effect over the general provision, even in a situation where non obstante clause is not provided for or even where there is no inconsistency between the two legislations. For this proposition, he relied upon following case laws: 1. Jain Ink Mfg. Co. vs. LIC of India AIR 1981 SC 670; 2. Ashoka Marketing Ltd. vs. Punjab Nadonal Bank AIR 1991 SC 855; 3. South Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h reference to each debtor, it will amount to a write off and not a mere provision for doubtful debts. The effect of insertion of Explanation to s. 36(1)(vii) was explained by CBDT in its Circular No. 14 of 2001 dt. 22nd Nov., 2001 [(2002) 172 CTR (St) 13 : (2001) 252 ITR (St) 65 at p. 92]. It was opined that the Explanation is inserted in s. 36(1)(vii) so as to clarify that any bad debt or part thereof written off as irrecoverable, in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. The effect of insertion of Explanation is that it explains the apparent inconsistency in the legislation to clarify an issue as held in the case of Dilip N. Shroff vs. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 291 ITR 519 (SC) at p. 521. He thereafter submitted that since the only prohibition while allowing deduction under s. 36(1)(vii) is that any provision will not be allowable but it has not explained the manner of write off which has been judicially interpreted by various decisions cited above. Thus, even if a provision is made in the accounts by debit to the P&L a/c and corresponding credit to the bad debt provision accoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Revenue submitted that guidelines issued by the RBI under delegated power under s. 45JA cannot override the specific provisions of Explanation to s. 36(1)(vii) of the Act because of the non obstante clause appearing in s. 45Q of the RBI Act on account of following reasons: (a) It amounts to repeal of express provisions of the Act which is contrary to Art. 143 of the Constitution of India itself. Reference is made to Art. 143, Constitution of India & Delhi Law Act AIR 1951 SC 332. (b) Compulsory provisions will always control discretionary provisions as held in the case of Life Insurance Corpn. of India vs. S.V. Oak AIR 1965 SC 975 p 980 and South India Corpn. (P) Ltd.'s case. Shri Maheshwari further submitted that all the decisions compiled by learned counsel of assessee on the non obstante clause being Jain Ink Mfg. Co., Life Insurance Corpn. of India and State of Maharashtra vs. Madhakar Narayan Mardikar AIR 1991 SC 207 de facto support the case of the Revenue only for the reasons that in all the cases it has specifically been stated that non obstante clause will have overriding effect only in those cases if there is an inconsistency. However, from the preamble and heading of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... submitted that there should be a clear inconsistency between the two enactments before giving an overriding effect to the non obstante clause. But when the scope of the provisions of an earlier enactment is clear, the same cannot be cut down by resort to non obstante clause as held in R.S. Raghunath vs. State of Karnataka AIR 1992 SC 81. The Supreme Court in Jostiniano Augusto De Piedade Barreto vs. Antonio Vicente Da Fonseca AIR 1979 SC 984 held that a law which is essentially general in nature may contain special provision on certain matters and in respect of these matters it would be classified as a special law. Therefore, unless the special law is abrogated by express repeal or by making provisions which are wholly inconsistent with it, the special law cannot be held to have been abrogated by mere implication. There should be a clear inconsistency between the two enactments before giving an overriding effect to the non obstante clause but when the scope of the provisions of an earlier enactment is clear, the same cannot be cut down by resort to the non obstante clause. 8.2 Shri Maheshwari submitted that the provisions of s. 36(1)(vii) are applicable in the present case and th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. and that of Southern Technologies Ltd. (Tax Case No. 1 of 2002 dt. 23rd Jan., 2002). These being the only decisions on the subject, may be followed in preference to the judgments of the Tribunal. It has been held in following cases that the Tribunal is obliged to follow the decision of any High Court of other State where there is no contrary decision on that matter by any other High Court (i) CIT vs. Smt. Nirmalabai K. Darekar (1990) 186 ITR 242 (Bom), (ii) CIT vs. Smt. Godavaridevi Saraf (1978) 113 ITR 589 (Bom). In CIT vs. Maganlal Mohanlal Panchal (HUF) (1994) 210 ITR 580 (Guj) , Hon'ble Gujarat High Court following Smt. Nirmalabai K. Darekar's case held that Tribunal is bound to follow sale judgment of different State's High Court if there are no contrary judgments on the point. In the case of IAC vs. Bareilly Corpn. Bank (1988) 27 ITD 1 (Del) the Tribunal held that when there is a conflict between observations made by Tribunal and that made by any High Court or Hon'ble Supreme Court, the observation of latter will prevail. It has been held that law declared by a High Court is binding in a State or o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the RBI Act is a special Act. There is no inconsistency between the two statutes and each operates in its own field. Thus, on the basis of Prudential Norms, the provision made in respect of NPA is not an allowable deduction under s. 36(1)(vii) of the Act since as per Explanation to s. 36(1)(vii), bad debt written off shall not include provision for bad and doubtful debts made in the accounts of the assessee. Thus, the order of learned CIT(A) needs to be upheld. 9. We have carefully considered relevant facts, arguments advanced and various precedents cited. To consider the matter in its proper perspective, relevant provisions of the various statutes referred to are extracted hereunder: "Sec. 36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s. 28- ...................... (vii) Subject to the provisions of sub-s. (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to any such d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ritten off as irrecoverable in the accounts of an earlier previous year (being a previous year relevant to the assessment year commencing on the 1st April, 1988, or any earlier assessment year), but the AO had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv) where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st April, 1988, or any earlier assessment year) and the AO is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, the provisions of sub-s. (6) of s. 155 shall apply; (v) where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause. Sec. 43D. Notwithstanding anything....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nancial companies generally or to a class of non-banking financial companies or to any non-banking financial company in particular as to- (a) the purpose for which advances or other fund based or non-fund based accommodation may not be made; and (b) the maximum amount of advances or other financial accommodation or investment in shares and other securities which, having regard to the paid-up capital, reserves and deposits of the non-banking financial company and other relevant considerations, may be made by that non-banking financial company to any person or a company or to a group of companies." Sec. 45Q of the RBI Act: Chapter III-B to override other laws-The provisions of this chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force of any instrument having effect by virtue of any such law." In exercise of the powers conferred by s. 45JA of the RBI Act, 1934, Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 were issued. The said Prudential Norms are applicable to a non-banking financial company which is having a net owned fund (NOF) of Rs. 25 lakhs and above and accepting/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty or due to any fraudulent act or omission on the part of the borrower; (xii) 'Non-performing asset' (referred to in these directions as 'NPA') means: (a) an asset, in respect of which, interest has remained past due for six months; (b) a term loan inclusive of unpaid interest, when the instalment is overdue for more than six months or on which interest amount remained past due for six months; (c) a bill which remains overdue for six months; (d) the interest in respect of a debt or the income on receivables under the head 'other current assets' in the nature of short term loans/advances, which facility remained overdue for a period of six months; (e) any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for a period of six months; (xv) 'standard asset' means the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business; (xvi) 'sub-standard assets' means: (a) an asset which has been classified as non-performing asset for a period of not exceeding two years; (b) an asset....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ery limited powers in RBI inasmuch as the RBI was only empowered to regulate or prohibit issue of prospectus or advertisement soliciting deposits. For violation of directions, the RBI could issue orders prohibiting erring companies from accepting further deposits. So long as these directions relating to deposit acceptance was complied, no further stringent action could be initiated. Thus, the legislative intent in RBI Act and focus thereof were thus mainly to moderate the resource mobilizing exercise by way of deposits by NBFC and thereby providing indirect protection to the depositors by linking the quantum of deposit to their NOF. The RBI Act was amended in January, 1977 by effecting comprehensive changes in Chapters III-B and V of the RBI Act and vesting more powers with the RBI. The amended Act, inter alia, provides for vesting with the RBI powers to give directions to the NBFC regarding Prudential Norms The regulatory attention was focused on NBFC accepting public deposits. The RBI has favoured a policy to restrict the short-term and the unsecured borrowings of the NBFCs on the strength of their credit rating, the size of NOF and the activities of the companies. While the over....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions. Having found that there is no inconsistency between the two provisions, s. 45Q of the RBI Act will not entitle the assessee to claim deduction in respect of provision for doubtful assets and sub-standard assets so long as it does not fulfil the conditions prescribed in the IT Act. There cannot be a quarrel with the proposition that a special Act overrides the provision of a general Act to the extent there is inconsistency between the two and various authorities cited in this regard are to be respected. We also agree with the view that Prudential Norms issued by the RBI in exercise of powers conferred by s. 45JA of the RBI Act have the same legal sanction as that of a statute. These Prudential Norms issued under the authority of the Act can be called a subordinate legislation and have the same force as the section of the Act so long as they do not override the main provisions of the Act. These statutory rules cannot be described as administrative directions so as to ignore the same as having no legal sanctity. The Prudential Norms issued by the RBI are statutory in nature and are, therefore, mandatorily to be complied with. Various authorities cited in this regard lay down so ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....duction is permissible under the provisions of the Act provided the conditions specified in this regard are complied with. The Act lays a general tax on the whole population and all the persons unless specifically exempt from the charge. Therefore, the presumption is of equality of the incidence of tax rather than of exemption for a few. The Act does not distinguish between a non-banking finance company accepting the public deposits which is governed by the Prudential Norms issued by RBI and other non-banking finance companies or even other persons charge-able to tax under the IT Act. There is no presumption in favour of the exemption of the few from the incidence of a general tax. Presumption is always for equality and rather against the partiality which is involved in special exemption. Thus, unless the statute otherwise requires or makes specific exemption to certain class of persons or certain class of assessees, the provision of the Act will apply uniformly without any undue favour to a particular class of assessees. We do not ascribe to the view that the intention of the legislature leads to discriminate between the different persons liable to be charged of IT under s. 4 of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f is in respect of provision for bad and doubtful debts or provision for NP A or so long as amount provided is not in respect of a bad debt, the same is not allowable as deduction under s. 36(1)(vii). Sec. 36(1)(vii) provides for allowance of 'bad debt' and not 'any debt'. Thus, the precondition is that the debt has turned into 'bad debt' and not anything else. It is contended by Shri Bajpai that the amount is not an ad hoc provision but strictly in accordance with cl. 8 of the Prudential Norms issued by the RBI. In our opinion, it will not materially alter the situation as the amount debited to P&L ale is still in respect of a provision for NPA which is not classified as bad debt by the assessee and so long as the conditions prescribed under the IT Act is complied with, deduction under the IT Act is not permissible. 14. As regards various decisions of the Tribunal cited by both the counsel, though we have noted the same we, for the reasons stated above, answer the question referred to this Bench in negative i.e., in favour of Revenue and against the assessee. 15. As regards the decision of Hon'ble Madras High Court in the case of T.N. Power Finance & Infrastructure Development C....