TaxTMI 
TaxTMI 
2006 (5) TMI 188
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....t petition was that the Reserve Bank of India being the statutory and regulatory authority, illegally approved the proposal of the Respondent No. 6 Development Credit Bank Ltd. for writing off of debts, amounting to Rs. 120 crores, of the Bank without following the proper procedures prescribed under the provisions of sections 13 and 14 of the Securitisation Act, 2002 and sections 19 and 31A of the Recovery of Debts Due to Banks Act, 1993. 3. To appreciate the grievance of the appellant it is necessary to notice the background in which the controversy arises. 4. On 19-2-2003, Respondent No. 6 Bank made a request to the Reserve Bank of India to grant permission and allow the Bank to write off from its financial records, debts that had turned non-performing assets over the years amounting to Rs. 120 crores. It was stated in the letter of request, that to institute better balance sheet management and a fighter control environment, the Board of Directors and the principal shareholders of the Bank in France had approved the bank's strategy to write off these debts, subject to approval of the Reserve Rank of India. The Bank had taken necessary steps to recover the dues and will continue....
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.... 1949, it was explained that every banking company incorporated in India must create the reserve fund and shall out of the balance of profit of each year as disclosed in the profit and loss account prepared under section 29 of the Act and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than 20 per cent of such profit. The said limit was raised to 25 per cent in December 1974. In terms of section 17(2), a banking company can appropriate sums from the reserve fund or the share premium account, and the same must be reported to the Reserve Bank of India within 21 days explaining the circumstances relating to such appropriation. This implies that appropriation of the statutory reserve fund does not require the Reserve Bank's prior approval though there is a statutory obligation on banks to report appropriation to the Reserve Bank of India. The appropriation of other reserves does not cast any obligation on banking companies to report to the Reserve Bank. However, as a matter of practice, the banking companies are approaching the Reserve Bank for permission before appropriating their reserves for writing off the bad debts. The Reserve Bank consi....
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....ies do not need Reserve Bank's permission to write off bad debts. As mentioned earlier, the banking companies are also not under statutory obligation to seek the Bank's approval for appropriation of sums from their reserves. However, as a matter or practice, the banking companies do approach the Reserve Bank for permission, before utilizing their reserves, for writing off the bad debts and the Reserve Bank grants approval, if it is in order, on considering their financial position and other related factors as stated above. 10. In its counter affidavit filed before this Court the Respondent No. 6 Bank stated that the dues from various debtors had necessarily to be shown as Non Performing Assets (NPAs) as per the guidelines issued by the Reserve Rank of India. The Reserve Bank of India monitors the NPAs strictly and during the periodical inspections, goes into the matter of NPAs in detail. The Reserve Bank of India had issued a circular letter dated 28-7-1995, and has been issuing circulars directions, guidelines from time to time prescribing the manner, in which NPAs could be categorized and where and how amounts should be written off. Compliance of these guidelines is rigorously m....
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....rticulars about these 15 parties and the steps taken by the Bank to recover the amounts due, have been set out in the counter affidavit which was filed in compliance of the order of this Court dated 5-7-2004. 14. It will thus appear from the facts noticed above that the writing off of NPAs is an exercise undertaken to clean the balance sheet, and is an internal accounting procedure. It does not require the permission of the Reserve Bank of India but as explained by the Reserve Bank of India, banks usually make such a request as a matter of practice and permissions are granted by the Reserve Bank after considering all relevant aspects of the matter. In the case where a banking company appropriates sums from the reserve fund or the share premium account, it is required to report to the Reserve Bank of India within 21 days explaining the circumstances relating to such appropriation. 15. In the instant case also since the Respondent No. 6 Bank proposes to appropriate the sums from their reserves, it sought by way of abundant caution the approval of the Reserve Bank of India. There is, therefore, no justification for the grievance that in granting approval to the bank to write off its....
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....he banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors' tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules." 18. The appellant submitted before us that the Reserve Rank of India had failed to exercise the statutory powers vested in it and therefore, it failed to perform a legal duty cast upon it by law. The appellant was, therefore, entitled to invoke the writ jurisdiction of the High Court for issuance of Writ of Mandamus to the Reserve Rank of India to act in accordance with its statutory obligations. In this connection, reference has been made to sections 21, 22(4), 27, 30, 35, 35A, 36, 36AA, and 45 of the Banking Regulation Act, 1949. 19. Section 21 of the Banking Regulation Act empowers the Reserve Bank to determine the policy in relation to advances to be followed by banking companies generally, or by any banking company in particular. The policy, if so, determined by the Reserve Bank of India in public interest or in the interest of depositors or banking policy, must be....
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.... of reconstitution or amalgamation. We fail to appreciate how any of these provisions is relevant to the issue that arises in the instant appeal. No doubt the Reserve Bank has been vested with wide powers to control and regulate the functioning of banks. If need be, those powers may be exercised by the Reserve Bank. In the instant case, we are only concerned with the writing off of Non Performing Assets. Nothing has been produced on record to satisfy us that the Reserve Bank has acted in breach of its legal obligations in the matter of granting permission to the respondent No. 6 bank to write off the debts that have become Non Performing Assets. 26. The appellant made a general submission that there was no justification for writing off the bad debts amounting to Rs. 120 crores, Respondent No. 6 Bank should have taken all necessary steps to recover the debts and to enforce its rights under sections 13 and 14 of the Securitisation Act, 2002 and sections 19 and 31A of the Recovery of Debts Due to Banks Act, 1993. The Bank can proceed against the original security and the secured assets of the borrowers and recover its dues. Writing off bad debts was detrimental to the interest of a b....