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2013 (3) TMI 266
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....ssets under the Interest Tax Act 1999-2000 and 2000-2001? 2. The assessee-Sakthi Finance Limited is a Non-Banking Financial Company. For the assessment years 1999-2000 and 2000-2001, the Assessing Officer has added accrued interest on NPA accounting to Rs.1,80,34,379/- and Rs.56,09,260/ for the two years. The assessee preferred appeals before C.I.T. (Appeals). In the case of Commissioner of Income-tax Vs. Elgi Finance Limited, (2007) 293 ITR 357, the Madras High Court has held no interest could be said to have accrued on loans doubtful of recovery which were classified as NPA. Following the said decision in Elgi Finance, (2007) 293 ITR 357, CIT (Appeals) allowed the appeals holding that the accrued interest on NPA is not assessable to income-tax. In the appeal preferred by the revenue before the Tribunal, following its own decision in Elgi Finance, Ltd. Vs. Additional Commissioner of Income Tax, Special Range I, Coimbatore in I.T.A.No.358, 359, 360 and 361(Mds)/2002, Tribunal held that no addition could be made in the hands of the assessee Non-Banking Financial Company (NBFC) in respect of unrealised accrued interest when the loan was classified as NPA. 3. Learned counsel for....
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.... 6. Learned counsel for the assessee submitted that referring to the decision of the Supreme Court in Southern Technologies Limited, (2010) 320 ITR 577, the Delhi High Court in COMMISSIONER OF INCOME TAX VS. VASISTH CHAY VYAPAR LTD., (2011) 330 ITR 440 held that where the interest was not received on NPA, the same could not be treated to have accrued in favour of the assessee or the real income in the hands of the assessee. 7. The controversy arising for consideration is, whether non-recognition of "interest income" on NPAs by the assessee following RBI guidelines would by itself constitute a valid ground for not recognising the said income on the basis of its non-accrual, the adopted method of accounting, being admittedly mercantile. 8. In the present case, the assessee Company is Non-Banking Financial Company. The assessee objected to the inclusion of interest on NPA that it is not assessable to income. The assessee pleaded that in the earlier assessment years they got a relief on the same issue based on the judgment of the Tribunal in the case of Elgi Finance, Ltd. Vs. Additional Commissioner of Income Tax, Special Range I, Coimbatore in I.T.A.No.358, 359, 360 and 361(Md....
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....1. Elaborating upon the deviations between RBI Directions 1998 and Companies Act, the Hon'ble Supreme Court in the case of Southern Technologies Limited, (2010) 320 ITR 577, held as under: "Deviations between the RBI Directions, 1998 and the Companies Act 27. Broadly, there are three deviations: (i) in the matter of presentation of financial statements under Schedule VI to the Companies Act; (ii) in not recognising the incomeunder the mercantile system of accounting and its insistence to follow cash system with respect to assets classified as NPA as per its norms; (iii) in creating a provision for all NPAs summarily as against creating a provision only when the debt is doubtful of recovery under the norms of the accounting standards issued by the Institute of Chartered Accountants of India. 28. These deviations prevail over certain provisions of the Companies Act, 1956 to protect the depositors in the context of income recognition and presentation of the assets and provisions created against them. 29. Thus, the P&L account prepared by NBFC in terms of the RBI Directions, 1998 does not recognise income from NPA and, therefore, directs a provision to be made in t....
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....income theory which is engrained in the Prudential Norms for recognition of revenue by NBFC." 13. The Delhi High Court considered the decision of Supreme Court in Southern Technologies Limited, (2010) 320 ITR 577 and held that the decision of the Hon'ble Supreme Court in case of Southern Technologies Limited, (2010) 320 ITR 577, apply only to provisioning norms against NPA accounts. The Delhi High Court held that Southern Technologies Limited did not apply to the income recognition norms provided by RBI but only to the prudential norms (against accounts). 14. True, as observed in the case of COMMISSIONER OF INCOME TAX VS. VASISTH CHAY VYAPAR LTD., (2011) 330 ITR 440, the Hon'ble Apex Court was seized with the issue of provision for bad and doubtful debts in respect of NPA accounts and not income not brought on books on the basis of non-accrual. But the Delhi High Court had taken the view that Southern Technologies Limited, (2010) 320 ITR 577 did not apply to the income recognition norms provided by RBI. We are of the view that by a careful reading of the decision of Southern Technologies Limited, (2010) 320 ITR 577, the Hon'ble Supreme Court also dealt with the aspect i.e., i....
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....sundry debtors/advances. Therefore, the RBI has taken a position as a matter of disclosure, with which we agree, that if an NBFC deducts a provision for NPA from sundry debtors/loans and advances, it would amount to netting from the value of assets which would constitute breach of Paragraph 9 of the RBI Directions, 1998. Consequently, NPA provisions should be presented on the liabilities side of the balance sheet under the head current liabilities and provisions as a disclosure norm and not as accounting or computation of income norm under the Income-tax Act. At this stage, we may clarify that the entire thrust of the RBI Directions, 1998 is on presentation of NPA provision in the balance-sheet of an NBFC. Presentation/disclosure is different from computation/taxability of the provision for NPA. The nature of expenditure under the Income-tax Act cannot be conclusively determined by the manner in which accounts are presented in terms of the 1998 Directions. There are cases where on the facts courts have taken the view that the so-called provision is in effect a write-off. Therefore, in our view, the RBI Directions, 1998, though deviate from the accounting practice as provided in the....
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....et. They do not touch upon the nature of the expense to be decided by the Assessing Officer in the assessment proceedings. Applicability of Section 145 40. At the outset, we may state that in essence the RBI Directions, 1998 are prudential/provisioning norms issued by RBI under Chapter III-B of the RBI Act, 1934. These norms deal essentially with income recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect true and correct profits. By virtue of Section 45-Q, an overriding effect is given to the Directions, 1998 vis-`-vis income recognition principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions, 1998 and the Income-tax Act operate in different areas. These Directions, 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the permissible deductions or their exclusionunder the Income-tax Act. The inconsistency between these Directions and the Companies Act is only in the matter of income recognition and presentation of financial statements. The accounting policies adopted by an NBFC cannot determine the taxable inco....
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....al findings so rendered, cannot be relied on by the assessee, more particularly, when the decision of the Hon'ble Supreme Court made in the case of Southern Technologies Limited was not at all placed before it. At any event, it is also pointed out that in the aid decision that the interest from such non-performing assets would be taxed in the appropriate assessment years on the basis of actual receipt and the issue of interest on non-performing assets could not be included in the assessment of the assessee till such accrual arose. Therefore, the said decision is also distinguishable and cannot be relied on by the assessee, in the light of the decision of the Hon'ble Apex Court in the case of Southern Technologies Limited. 18. Mere characterisation of an account as a NPA would not by itself be sufficient to say that there is uncertainty as regards realizability of income or interest income thereon. Accrual of interest is a matter of fact to be decided separately for each case on the basis of examination of the facts and circumstances. The same would require an assessment of the relevant facts and circumstances of each case. Only by assessment of facts and circumstances, the Autho....