TaxTMI 
TaxTMI 
2020 (8) TMI 639
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....f Non-Banking Financial Institution ('NBFI' in short). Accordingly, the CoR was issued in favour of the petitioner on 17.07.2002. 2(ii). The CoR dated 17.07.2002 was issued by respondents No.2 to 4-RBI under Section 45-IA of the RBI Act, 1934, subject to terms & conditions stipulated therein. Condition No.vi is extracted hereinafter:- "(vi) Your company shall comply with the provisions of the Reserve Bank of India Act, 1934, as applicable to a non-banking financial company, and abide by all the directions, guidelines, instructions or advices of the Reserve Bank of India, as may be in force from time to time." The CoR was for carrying on "the business of non- banking financial institution without accepting public deposits subject to the conditions given on the reverse." Conditions No.2 and 3 mentioned on the reverse of certificate were as under:- "2. The Certificate of Registration is issued to your company subject to your continued adherence to all the conditions and parameters stipulated under Chapter III B of the Reserve Bank of India Act, 1934. 3. Your company shall be required to comply with all the requirements of the Directions, guidelines/ins....
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.... ................................................" Thus, for registration as NBFI, minimum NOF of Twenty-Five Lakh Rupees, not exceeding Two Hundred Lakh Rupees, as may be specified by the Bank in the Official Gazette, was required by NBFC. However, an NBFC in existence on the commencement of RBI Amendment Act, 1997 and having an NOF of less than Rs. 25 Lakh to fulfil the requirement of NOF could carry on the business of NBFI for a period of three years from such commencement or upto a maximum period of six years as the Bank may allow after recording reasons. Meaning thereby that all NBFCs in existence in 1997 and carrying on the business of NBFIs were required to attain the limit of Rs. 25-200 Lakhs as NOF notified by the Bank in the Official Gazette, within 3-6 years. Possession of the NOF notified by the Bank was a condition precedent for new registration as NBFI after RBI Amendment Act, 1997. 2(iv). On 27.03.2015, RBI issued a notification specifying Rs. 200 Lakhs as NOF required for an NBFC to commence or carry on business of NBFI. This notification further provided that the NBFCs holding CoR, issued by the RBI and having NOF of less than Rs. 200 Lakhs can continue to ca....
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....vances bills purchased and discounted (including H.P. and lease finance) made to and deposits with companies in the same group/Subsidiaries/WoS/JVs/Other NBFCs etc. 54.41 Amount in item 19 in excess of 10% of Owned Fund 51.25 Net Owned Fund (Tier-I) 150.33" 2(vi). In its response to the above referred letter of RBI, petitioner defended its calculation of NOF in the balance sheet for the year 2016-2017 by placing reliance upon RBI master circular no REF.DBS.FID.NO.C-7/ 01.02.00/2003-04, re-issued with amendments in 2012 DBOD.FID.FIC.No.4/01.02.00/2012-13, where following definition of NOF was given in paragraph No.3.4:- "3.4 Net Owned Funds in respect of NBFCs Net owned funds will consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets. From the aggregate of items will be deducted accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten per....
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....usiness of NBFI, therefore, order dated 22.01.2019, cancelling the petitioner's CoR, as affirmed by the Appellate Authority on 14.02.2020 was bad in eyes of law. (B). Even if for the sake of argument, petitioner's NOF is assumed to be less than the minimum prescribed limit of Rs. 200 Lakh, then also, the proviso after Section 45-IA(6)(iv) of RBI Act provides for giving an opportunity to the petitioner for complying the provisions/conditions on such terms as may be specified by the Bank. This opportunity has been denied to the petitioner. On this ground also, the impugned order deserves to be quashed and set aside. 4. We may discuss hereinafter the case of the petitioner under the above two points while noticing rival contentions of the parties:- 4(i). Wrong Calculations:- 4(i)(a). Explanation I to Section 45-IA falling under Chapter III B of the RBI Act, defines NOF as under:- "(I) "net owned fund" means- (a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting there from- (i) accumulated balance of loss; (ii) deferred revenue expenditure; and ....
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.... of NBFCs Net owned funds will consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets. From the aggregate of items will be deducted accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Funds. The NOF should be computed on the basis of last audited Balance Sheet and any capital raised after the Balance Sheet date should not be accounted for while computing NOF." In the description of NOF given in the Master Circular dated 01.07.2015, there is no specific reference to advances and loans advanced by NBFC to its group/ subsidiary companies. Learned Senior Counsel argued that Clause 3.4 of the Circular though, inter alia, provides for deduction of investment made by NBFC in favour of its group/subsidiary companies while calculating its NOF, however, it does not provide for deduc....
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....y Exim Bank, NABARD, NHB and SIDBI. NOF described therein cannot be read for calculating NOF of petitioner NBFC. The NOF of petitioner has to be calculated only in terms of Section 45-IA of RBI Act. Petitioner has not disputed investment of Rs. 17 Lakhs and loans of Rs. 54.41 Lakhs advanced by it to its Group Companies. Therefore, these amounts in excess of 10% of Owned Fund have been justifiably deducted by RBI while determining Rs. 150.33 Lakhs as NOF of the petitioner. In view of the above discussion, there is no need to refer to the judgments cited by learned Senior Counsel for the petitioner, viz. Peerless General Finance and Investment Co. Limited and another Versus Reserve Bank of India, (1992) 2 SCC 343; Sudhir Shantilal Mehta Versus Central Bureau of Investigation, (2009) 8 SCC 1; and Southern Technologies Limited Versus Joint Commissioner of Income Tax, Coimbatore, (2010) 2 SCC 548, seeking enforcement of the circular over and above the provisions of RBI Act. Point is answered accordingly. 4(ii). Learned Senior Counsel for the petitioner next contended that even if the NOF of the petitioner was determined as falling short of the limit prescribed by the RBI, then, al....
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.... Act. Cancellation of CoR under Section 45- IA(6)(ii) attracts the proviso to the section, which in turn provides for grant of an opportunity to the petitioner for taking necessary steps for complying with provisions and fulfilling the required conditions. Rebutting this submission, learned counsel for the respondent-RBI contended that CoR of the petitioner was not cancelled under the provisions of Section 45-IA(6)(ii), but by taking recourse to Section 45-IA(6)(iv). The proviso relied by the petitioner is not applicable in case of cancellation of CoR under Section 45-IA(6)(iv). Therefore, no opportunity can be granted to the petitioner to make good the non-compliance. 4(ii)(b). In its notification dated 27.03.2015, the RBI had specified Rs. 200 Lakhs as minimum NOF required by an NBFC to commence or carry on business of NBFI. The then existing NBFCs holding CoR for carrying on business of NBFI were given timeline upto 01.04.2016 for achieving NOF of Rs. 100 Lakhs and upto 01.04.2017 for attaining NOF of Rs. 200 Lakhs. Petitioner NBFC did not achieve the minimum prescribed limit of NOF within the stipulated period. It failed to comply with the directions issued by the Bank un....