TaxTMI 
TaxTMI 
2011 (2) TMI 40
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income recognition and for provisioning for bad and doubtful debts. The difference amount calculated which is as follows is brought to tax being the interest not covered by the provisions of section 43D of the Income-tax Rules. Sl.No. Interest on NPA's (As per section 43D r.w.r Rule 6EB) Interest on NPA's (As per NHB Guidelines) Amount (Rs.) 1. 5,82,30,057 6,06,07,447/- 23,77,390/- 2. The assessee is a company engaged in the business of Housing Finance. The assessee follows the mercantile system of accounting. Under this system of accounting the assessee ought to account for all receipts in the books of account and when they fall due irrespective of the dates when they are received. The assessee in accordance with the system of accounting that it was following, ought to have accounted for interest receivable by it on all debts. The assessee being a public company, has right under section 43-D(b) of the Income-tax Act, 1961 (the Act), despite the fact that it was following a mercantile system of accounting, not to recognize interest income as having accrued on such categories of bad and doubtful debts as may be prescribed having regarding to the guidelines issued by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In that case, the claim of the Assessee regarding the quantum of interest income which has not accrued, applying the norm of 90 days for considering an asset as non-performing asset as against the norm of 180 days laid down by rule 6-EB of the rules, should be accepted. In this regard, reliance was placed by him on the following judicial pronouncements: Delhi Farming and Construction (P) Ltd. v. CIT 260 ITR 561(SC). It was a case where the question arose in the context of section 104 of the Act, which levies super tax on the undistributed income of certain companies. Under the relevant provisions the ITO if he is satisfied that in respect of any previous year the profit and gains distributed as dividends by any company within twelve immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company for that financial year, the ITO had power to levy super tax. The ITO had a discretion not to levy super tax, if having regard to the losses incurred by the company in earlier year, or to the smallness of profits made on the previous year, the payment of a dividend of a larger dividend that declared would be unreaso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed as deduction. The Rules was held to be travelling beyond the Act and held invalid. 5. It was submitted that the expression "having regard to" has to be given a meaning and every part of a section has to be given effect to. It was submitted that de hors the provisions of section 43D, the Assessee was entitled to claim that no income accrued to the Assessee by relying on the Guidelines of National Housing Bank, under whose directions and control, the Assessee has to function. According to the learned counsel for the Assessee, the guidelines of NHB are binding on the Assessee and have to be followed. In this regard, our attention was drawn to the decision of the Hon'ble Delhi High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. 330 ITR 440. The Assessee in that case, which was a non-banking finance company, was following mercantile system of accounting and had in compliance with directions of RBI treated interest on inter-corporate deposits which were not received for a period of more than 6 months, as non-performing asset and such interest income was not recognised in the books of account. The Hon'ble High Court after considering the decision of the Hon'ble Supreme Court in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as a whole having regard to the balance sheet of such business as on the valuation date. The Hon'ble SC held that the expression "having regard to" found in section 7(2) of the WT Act, does not make the balance sheet conclusive or binding or decisive of the value of assets. 9. It was submitted that rule 6EB is not totally contrary to NHB guidelines. The Parliament while enacting section 43D had left the discretion to prescribe the mode of determining what is bad or doubtful debts interest on which need not be recognised as income, to the rule making authority. Had it been the intention of the Legislature to make it mandatory for the rule making authority to change the criteria for deciding what are bad and doubtful debts in tune with the modification of the norms in this regard by the NHB, it would have given such an authority to the rule making authority in the provisions of section 43-D of the Act. Absence of such a mandate in the relevant provisions means that the discretion in this regard is left to the rule making authority. 10. On the argument of the learned counsel for the Assessee that applying real income theory, interest income cannot be considered as having accrued bec....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or the State Finance Corporation or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. 15. The Legislature having laid down the broad principles of its policy in section 43D(b) of the Act, has left the details to be supplied by the rule making authority. What is delegated to the rule making authority is the power to determine, the debts which can be considered as bad and doubtful, interest income on which can be considered as not having accrued, to an Assessee following mercantile system of accounting. In doing so, the rule making authority has been directed to have regard to the guidelines issued by the NHB in relation to such debts. Section 43D of the Act, does not mandate the rule making authority to follow the guidelines issued by the NBH in relation to bad and doubtful debts. In exercise of such power the rule making authority has enacted Rule 6EB of the Rules. The rule so enacted originally was in conformity with the guidelines issued by NHB. The guidelines were revised by NHB in the year 2004 but the rule making authority did not think it fit to revise the rules to be in conformity with the rev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al income theory the interest income in question cannot be brought to tax. In this regard at the outset we have to bear in mind that accrual under the mercantile system of accounting depends on the legal right to receive and the inability of the debtor to make payment will have no effect on the legal right of the creditor to receive. In State Bank of Travancore (supra), the Hon'ble Supreme Court had to deal with accrual of income in the context of interest on bad or doubtful debts in the case of Banks. The facts were that the assessee which was a subsidiary of the State Bank of India maintained accounts on mercantile system making entries on accrual basis. It adopted the calendar year as its previous year and the calendar years 1964, 1965 and 1966 for which assessment years 1965-66, 1966-67 and 1967-68 were the relevant A.Y. In the course of its banking business, the assessee charged interest on advances considered doubtful of recovery, otherwise called sticky advances, by debiting the concerned parties but instead of carrying it to its profit and loss account credited the same to a separate account styled "Interest Suspense Account" as the principal amounts of these sticky advance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....judgment in the case of UCO Bank (supra) however did not agree with the aforesaid view because one of the Circular of CBDT had been overlooked while rendering the aforesaid decision. The question before the Hon'ble Court was as to whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account and has not been brought to the profit and loss account of the assessee, can be included in the income of the assessee for the assessment year 1981-82. The Central Board of Direct Taxes had issued Circular No. 41 (V-6) D of 1952, dated October 6, 1952. The circular, inter alia, stated that "interest accruing to a money-lender on loans entered in the suspense account because of the extreme unlikelihood of their being recovered need not be included in the assessee's taxable income if the Income-tax Officer is satisfied that there is really little probability of the loans being repaid. It was considered desirable to extend this principle to banks which, instead of transferring the doubtful debts to a suspense account, credit the interest on such debts to that account provided the Income-t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te Assistant Commissioner in the exercise of his appellate functions". Under sub-section (2) of section 119, without prejudice to the generality of the Board's power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases, setting forth directions or instructions, not being prejudicial to assessees, as to the guidelines, principles or procedures to be followed in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecision is the majority judgment in State Bank of Travancore v. CIT [1986] 158 ITR 102, decided by a Bench of three judges of this court by a majority of two to one. This judgment directly deals with interest on "sticky advances" which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on "sticky" advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 1984, does not appear to have been pointed out to the court. What was submitted before the court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this po....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K.K. Sen [1965] 56 ITR 198 (SC)." 20. We agree with the submissions of the learned D.R. that the decision of the Hon'ble Supreme Court in the case of UCO Bank (supra) does not obliterate the ratio of the very same Hon'ble Court in the case of State of Bank of Travancore (supra) but only modifies the same insofar as a later circular which is benevolent had not been brought to the Hon'ble Courts notice. In that view of the matter, we agree with the submission of the learned D.R. that real income theory would be relevant but would have no application so as to defeat the provisions of the Act. In our view provisions of section 43D lay down the limits upto which interest income of bad and doubt....