Income Tax Appellate Tribunal - Delhi
New India Industries Ltd. vs Assistant Commissioner Of Income Tax on 26 October, 2007
Equivalent citations: (2007)112TTJ(DELHI)917
ORDER
Deepak R. Shah, A.M.
1. Hon'ble President under the powers conferred on him under Section 255(3) of the IT Act, 1961 has constituted the Special Bench to dispose of this appeal as well as to decide the following question:
Whether, a provision for non-performing assets (in short 'NPA') debited to P&L a/c and claimed as a deduction in accordance with the Prudential Norms issued by the RBI in exercise of powers conferred on it under s. 45JA of the RBI Act, 1934, called the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998, should be allowed as deduction while computing income from business under the provisions of the IT Act, 1961?
2. The appellant is a non-banking finance company (in short 'NBFC') registered with the Reserve Bank of India (in short 'RBI'). The assessee debited a sum of Rs. 6,38,758 in its P&L a/c, being 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. v. 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 income has to be computed only as per the provisions of the IT Act and the provision for NPA is neither an expenditure nor an allowance which are permitted deductions under Sections 28 to 43B of the Act and, therefore, the action of the AO in rejecting the claim of the assessee was justified.
5. Aggrieved by the order of the CIT(A), the assessee has preferred the present appeal, raising the following grounds of appeal:
1. The learned CIT(A) erred in fact and in law in not allowing provision for non-performing assets amounting to Rs. 6,38,758 debited to P&L a/c which has been claimed as per norms laid down by RBI which are applicable to non-banking finance company.
2. That alternatively if the deduction as claimed in ground No. 1 above is not admissible, then the direction be given that as and when this amount is received and shown as income as per RBI's direction, while computing the income the same should be accordingly reduced.
6. At the time of hearing, the Division Bench of this Tribunal noted that there is an apparent conflict in the decision rendered by various Benches of the Tribunal. It was found that in the following judgments the Tribunal has held that provision for NPA made in accordance with Prudential Norms for NBFC issued by the RBI in exercise of its power under the RBI Act, 1934 are to be allowed as deduction while computing the income under the IT Act:
1. ITA No. 1912/Del/2002, Hindustan Commercial Investment Tiust Ltd. v. Dy. CIT (Tribunal, Delhi Benches);
2. TEDCO Investment & Financial Services (P) Ltd. v. Dy. CIT (2004) 82 TTJ (Del) 259 : (2003) 87 LTD 298 (Del);
3. Overseas Sanmar Financial Ltd. v. Jt. CIT (supra).
However, in following cases a contrary view has been adopted:
1. Concepts Cables Ltd. v. Addl. CIT (2006) 103 TTJ (Mumbai) 48 : (2006) 101 ITD 143 (Mumbai);
2. Jt. CIT v. India Equipment Leasing Ltd. (cross-appeals) in ITA No. 1978/Mad/2000 and ITA No. 2021/Mad/2000 dt. 10th March, 2006 [reported at (2007) 111 TTJ(Chennai) 250--Ed.].
Accordingly, a reference was made to Hon'ble President to constitute a Special Bench to resolve the conflict. Hon'ble President, Tribunal, constituted this Special Bench to which the aforesaid question was referred and the entire appeal was also to be disposed of.
7. Learned Counsel for assessee Shri Bajpai firstly submitted that in the IT Act, special provision is made for a scheduled bank 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-clause (viia) of Sub-section (1) of Section 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 Section 43D, entities referred in Sub-clause (viia) of Sub-section (1) of Section 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 Section 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 Section 45JA of RBI Act, the RBI is empowered to determine policy and issue directions to regulate the financial system of the country to its advantage or to prevent affairs of any NBFC being conducted in a manner detrimental to the interest of depositor and in a manner prejudicial to the interest of NBFC. Under Sub-Section (2) of Section 45JA, the RBI may give directions to NBFC generally or to a class of NBFC or even to an NBFC individually. As per Section 45Q of RBI Act, the provisions of Chapter III-B shall have effect notwithstanding anything inconsistent therewith in any other law for the time being in force or any instrument having effect by virtue of any such law. Shri Bajpai on the basis of above provisions of RBI Act contended that the RBI Act shall have overriding effect over the provisions of the IT Act to the extent the provisions of IT Act are inconsistent with the provisions of RBI Act. He further submitted that in exercise of the powers conferred by Section 45JA of RBI Act, the RBI has issued directions called Non-Banking Financial Companies Prudential Norms (RBI Directions 1998, dt. 31st Jan., 1998) (hereinafter referred to as Prudential Norms). He invited our attention to the relevant clauses of the Prudential Norms to suggest that the appellant being an NBFC is under legal obligation to follow the provisioning requirement contained in the Prudential Norms and no option is available except to make the provision for NPA as per the norms laid down therein. He submitted that this delegated legislation called Prudential Norms shall have equal force as that of a statute enacted by the Parliament. For this purpose, he relied upon the following decisions:
1. CIT v. Ajanta Electricals ;
2. S.K. Lukman Ali v. Collector AIR 1989 Ori 191 NOC;
3. State of U.P. v. Babu Ram Upadhya ;
4. Challa Ramkonda Reddy v. State of A.P. by District Collector .
He submitted that in all these cases it has been laid down that the rules are to be considered as having the same force as the section of the Act so long as they do not affect, control or to derogate from the section of the Act. The rules having been framed in exercise of the powers conferred under the relevant statute are statutory in nature and, therefore, are mandatory. Such rules cannot be described as or equated with administrative directions. Such rules are specie of legislation. 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 Section 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. v. LIC of India ;
2. Ashoka Marketing Ltd. v. Punjab National Bank ;
3. South India Corporation (P) Ltd. v. Secretary, Board of Revenue .
He went on to submit that even if there are two parallel legislations, the subsequent legislation should be treated as special and the earlier legislation should be treated as general so that the subsequent legislation being treated as special shall prevail over the earlier legislation which is to be treated as general in nature.
7.2 Shri Bajpai further submitted that the amount is claimed as deduction under Section 36(1)(vii) of the Act r/w Section 36(2) of the Act. As per s. 36(1)(vii), the deduction is available in respect of amount of any bad debt or part thereof which is written off as irrecoverable in the accounts. The requirement of Section 36(1)(vii) is that the amount should be written off in the books of account but it does not provide for the manner of write off. Thus even if the amount is written off by way of making a provision, it amounts to a sufficient compliance. The Explanation to Section 36(1)(vii) does not provide that the manner of write off should be by way of crediting the account of the debtor. Thus, even under the Explanation to Section 36(1)(vii), there is no material change in the situation from the one prevailing earlier. He, therefore, submitted that even if the amount is written off by way of provision for bad and doubtful debt, it amounts to write off and, hence, deduction is allowable. For this proposition, he relied upon following case laws:
1. CIT & CEPT v. Jwala Prasad Tiwari ;
2. Vithaldas H. Dhanjibhai Bardanwala v. CIT ;
3. Sarangpur Cotton Mfg. Co. Ltd. v. CIT ;
4. CIT v. Union Carbide India Ltd. (1993) 70 Taxman 366 (Cal);
5. CIT v. Srivinayaga Pictures ;
6. Hongkong & Shanghai Banking Corporation v. CIT ;
7. CIT v. United Bank of India (1993) 115 CTR (Cal) 35 : (1993) 69 Taxman 505 (Cal);
8. Industrial Credit & Investment Corporation of India Ltd. v. IAC (1990) 32 ITD 315 (Bom);
9. State Bank of Bikaner & Jaipur v. Dy. CIT (1999) 65 TTJ (Jp) 480 : (2000) 74 ITD 203 (Jp).
He submitted that if provision is made for an unnamed debtor as if ad hoc on the basis of percentage of outstanding debts, it will be a case of bald provision but if the amount of provision is ascertained with 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 Section 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 LTR (St) 65 at p. 92. It was opined that the Explanation is inserted in Section 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 v. Jt. CIT . He thereafter submitted that since the only prohibition while allowing deduction under Section 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 account, it will amount to a sufficient compliance for claiming deduction under Section 36(1)(vii). Since the amount is lent in the ordinary course of business of money lending carried on by the assessee, it amounts to a sufficient compliance of Section 36(2) so as to claim deduction under Section 36(1)(vii).
7.3 Shri Bajpai further submitted that the decision of Hon'ble Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corporation Ltd. v. Jt. CIT may not be relied upon as the decision was rendered on the basis of concession granted by the counsel on behalf of the assessee. Similarly, the decision of Hon'ble Madras High Court in the case of Software-Technologies Ltd. v. Jt. CIT (Tax Case Appeal No. 1 of 2002 dt. 23rd Jan., 2002) was also on the basis of concession. The Court was not called upon to consider the provisions of RBI Act vis-a-vis IT Act and also to consider as to whether RBI Act shall have overriding effect over the general provision of IT Act. The decision of Tribunal, Chennai Bench in the India Equipment Leasing (supra) has followed jurisdictional High Court decision. Since the said decision of Hon'ble Madras High Court was based on concession and without discussing the overriding provision of RBI Act, the ruling of the Tribunal in India Equipment Leasing Ltd.'s case (supra) may not be followed. As regards the decision of Tribunal in the case of Concepta Cables (supra), Shri Bajpai submitted that the conflict existing between the direction of RBI and the provisions of IT Act were not considered rather it was held that there is no conflict between the two. In the said case heavy reliance is placed on the Explanation inserted in Section 36(1)(vii) but the Explanation has not determined the method of write off and hence, the earlier decisions of the Court will apply so far as method of write off is concerned. To that extent, not following the various High Court decisions as to the method of the write off is incorrect and hence, the ruling of the Tribunal in Concept Cables Ltd.'s case (supra) is not a good law. He accordingly pleaded that the decisions of the Tribunal in the case of TEDCO Investment & Financial Services (P) Ltd. (supra) and Overseas Sanmar Financial Ltd.'s case (supra) needs to be followed and the claim of the assessee be allowed.
8. Shri G.K. Maheshwari, learned CIT and Shri Dhamija, learned senior Departmental Representative, appearing for the Revenue submitted that guidelines issued by the RBI under delegated power under Section 45JA cannot override the specific provisions of Explanation to Section 36(1)(vii) of the Act because of the non obstante clause appearing in Section 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 Article 143 of the Constitution of India itself. Reference is made to Article 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 Corporation of India v. S.V. Oak 980 and South India Corporation (P) Ltd.'s case (supra). Shri Maheshwari further submitted that all the decisions compiled by learned Counsel of assessee on the non obstante clause being Jain Ink Mfg. Co. (supra), Life Insurance Corporation of India (supra) and State of Maharashtra v. Madhakar Narayan Mardikar 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 the Chapter III-B, it can be made out that the RBI Act operates in the field of monetary and credit system of the country. It was never intended for computation of income for the purpose of IT Act. Thus, both the RBI Act and IT Act operate in different fields and they stand for different and distinct purpose without disobeying each other and hence, there is no inconsistency in the provisions. The IT Act and the RBI Act both are special Acts in their respective fields. In relative terms the RBI Act is a special Act for the purpose of banking regulations and it is a general Act with reference to banking activities. However, for the purpose of computation of income, the provisions of IT Act are special provisions in relation to the RBI guidelines. Reference was made to the decision of Hon'ble Madras High Court in the case of Thammayya v. Rajah Tyada Pasupati AIR 1930 Mad 96. Shri Maheshwari further submitted that when the legislature intended to give the benefit of allowing provision for bad and doubtful debts to certain entities, specific provisions were made in Clause (viia) of Sub-section (1) of Section 36 and also in Section 43D of the Act. Absence of such provision in Section 36(1)(vii) or absence of entities like NBFC in Clause (viia) of Section 36(1) implies that the legislature never intended to give such benefit to certain class of assessees in which the assessee falls. This is not an unintentional omission. The "causes omissus" cannot be supplied by the Courts but can be remedied only by the legislation. For this proposition, reliance was placed on following decisions:
(a) Smt. Tarulata Shyam and Ors. v. CIT ;
(b) CIT v. K.S. Vaidyanathan ;
(c) Padmasundara Rao (Decd.) and Ors. v. State of Tamil Nadu and Ors. ;
(d) Asstt. CIT v. Velliappa Textiles Ltd. and Ors. ;
(e) Prakash Nath Khanna v. CIT .
8.1 Shri Maheshwari submitted that the only decision rendered by the High Court on the subject is by Hon'ble Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corporation Ltd. (supra) and there being no contrary decision by any other High Court, it is obligatory on the part of the Tribunal to follow the same. Shri Maheshwari further 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 v. State of Karnataka . The Supreme Court in Jostiniano Augusto De Piedade Barreto v. Antonio Vicente Da Fonseca 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 Section 36(1)(vii) are applicable in the present case and. the RBI Act cannot override IT Act. The directions issued by the RBI requires the assessee to make provisions with regard to loss asset, doubtful asset and sub-standard asset and there is no dispute for making provisions as per this direction of the RBI so far as the accounting statements are to be prepared by the NBFCs as per the RBI guidelines. These guidelines are not binding on the IT authorities while making assessments on the income of NBFCs. Hence, to the extent the directions issued by the RBI requiring making of provisions as per its directions, there is no conflict between the directions of the RBI and IT Act. He submitted that the decisions in favour of the assessee are distinguishable. In the case of TEDCO Investment Financial Services (P) Ltd. (supra), it is distinguished on following grounds:
(i) IT Act was considered as a general Act even for the purpose of computation of income which is incorrect.
(ii) In this case income on NPA was not recognized as income as per the guidelines issued by the RBI under Section 45JA while in the instant case provision for NPA was made as bad and doubtful debts and debited to P&L a/c. The allowability of provision under Section 36(1)(vii) was not an issue before the Tribunal.
(iii) The decision in the case of TEDCO Investment Financial Services (P) Ltd. (supra) pertained to asst. yr. 1998-99 when the Explanation to Section 36(1)(vii) was not there as it was brought by the Finance Act, 2001 w.e.f. 1st April, 1989.
The decision of Tribunal in Overseas Sanmar Financial Ltd. (supra) is also distinguishable on following grounds:
(i) This decision was delivered under the presumption that since IT Department and the RBI both are part of Finance Ministry, the guidelines issued by the RBI are binding on the IT Department. However, the instructions issued by the CBDT in consultation with the RBI dt. 21st May, 2007 have clarified that the RBI guidelines do not involve any IT angle.
(ii) It never went into the crucial issue as to whether the guidelines issued by the RBI being delegated legislation can overrule the express provisions of the IT Act.
(iii) It pertains to asst. yrs. 1995-96 and 1996-97 and decision is prior to insertion of Explanation to Section 36(1)(vii) of the IT Act.
8.3 Shri Maheshwari further submitted that apart from the Tribunal decision in favour of Revenue, the only decision rendered by any High Court is that of Hon'ble Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corporation Ltd. (supra) 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 v. Smt. Nirmalabai K. Darekar ,
(ii) CIT v. Smt. Godavaridevi Saraf .
In CIT v. Maganlal Mohanlal Panchal (HUF) (1994) 210 ITR 580 (Guj), Hon'ble Gujarat High Court following Smt. Nirmalabai K. Darekar's case (supra) held that Tribunal is bound to follow sole judgment of different State's High Court if there are no contrary judgments on the point. In the case of IAC v. Bareilly Corporation 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 on the Tribunal in another State particularly when there is no other High Court decision available on that point. Reference was made to the decisions in Sayaji Iron Works (Quary) (P) Ltd. and Ors. v. ITO (1990) 36 TTJ (Ahd) 645; Justice Kuldip Singh v. ITO (1993) 46 ITD 251 (Chd); LTO v. P.M. Suthar (1995) 52 TTJ (Ahd)(TM) 260 : (1995) 53 ITD 1 (Ahd)(TM). Where there is only one decision of High Court on a particular point and there is no decision of any other High Court contrary to that decision, Tribunal is to follow that view, notwithstanding the fact that its earlier Bench even after considering High Court decision had taken a contrary view to that of High Court on that point and in such a case necessity of referring the matter to a larger Bench does not arise. If that is not done then the doctrine of hierarchical obedience in judicial matters would be frustrated. Larger Bench reference is only required when no High Court decision is available or conflicting decisions on same point are given. In Patil Vijaykumar v. Union of India , it was held that although a decision of any High Court is not binding on another High Court but there is no reason why with respectful caution if any help that can be given in the judgment should not be taken. Similar view has also been taken in the case of Dalmia Dadri Cement Ltd. v. CIT . He further submitted that the decision of Tribunal in TEDCO Investment & Financial Services (P) Ltd. (supra) favours the case of Revenue rather than that of assessee. In the said case, there were two issues before the Tribunal. One was with reference to recognition of interest income on advances which were required to be classified as NPA. The another issue was regarding allowability of bad debts. The Tribunal in paras 9.1 to 9.8 has held that the claim of bad debt is not allowable. He accordingly pleaded that the decision of Tribunal, Delhi in the case of TEDCO Investment & Financial Services (P) Ltd. (supra) is not an authority for the proposition that provision for NPA in accordance with Prudential Norms is an allowable deduction under Section 36(1)(vii) of the Act. Concluding his arguments, Shri Maheshwari submitted that in respect of computation of income, the IT Act is a special Act whereas for computing the net owned fund for the purpose of accepting deposit from public by an NBFC, 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 Section 36(1)(vii) of the Act since as per Explanation to Section 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:
Section 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 Section 28.
...
(vii) Subject to the provisions of Sub-section (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 Clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Explanation--For the purposes of this clause, 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. ...
(viia) in respect of any provision for bad and doubtful debts made by
(a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.
...
(b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A).
(c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A).
...
36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply.
(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money lending which is carried on by the assessee;
(ii) if the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made;
(iii) any such debt or part of debt may be deducted if it has already been written 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-section (6) of Section 155 shall apply;
(v) where such debt or part of debt relates to advances made by an assessee to which Clause (viia) of Sub-section (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.
Section 43D. Notwithstanding anything to the contrary contained in any other provision of this Act,--
(a) in the case of a public financial institution or a scheduled bank or a State financial corporation of a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts;
(b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its P&L a/c for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier.
In the RBI Act, 1934, Chapter III-B contains provisions relating to non-banking institutions receiving deposits and financial institutions.
Section 45J of the RBI Act : Power of Bank to determine policy and issue directions.--(1) If the bank is satisfied that, in the public interest or to regulate the financial systems of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the non-banking financial company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any of the non-banking financial companies relating to income recognition, accounting standards, making a proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off balance sheet items and also relating to deployment of funds by a non-banking financial company or a class of non-banking financial companies or non-banking financial companies generally, as the case may be, and such non-banking financial companies shall be bound to follow the policy so determined and the directions so issued.
(2) Without prejudice to the generality of the powers vested under Sub-section (1), the bank may give directions to non-banking financial 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.
Section 45Q of the RBI Act: Chapter III-B to ovemde other Jaws--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 Section 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/holding public deposits. It also applied to a residuary non-banking company as defined in the directions issued by the RBI. The relevant clauses of the said Prudential Norms are extracted herein:
Clause 3(i) : All the provisions of these directions save as provided for in clauses (ii) and (iii) hereinafter, shall apply to--
(a)a non-banking financial company, except a mutual benefit financial company (and a mutual benefit company), as defined in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 (referred to in these directions as 'NBFC') which is having net owned fund (referred to in these directions as 'NOF') of rupees twenty-five lakhs and above and accepting/holding public deposit;
(b) a residuary non-banking company as defined in the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 (referred to in these directions as 'RNBC').
(ii) The provisions of paras 10 and 12 of these directions shall not apply to.
(a) a loan company;
(b) an investment company;
(c) a hire purchase finance company; and
(d) an equipment leasing company, which is having NOF of rupees twenty-five lakhs and above but not accepting/holding public deposit.
(iii) These directions shall not apply to an NBFC being an investment company:
Provided that, it is:
(a) holding investments in the securities of its group/holding/ subsidiary companies and book value of such holding is not less than ninety per cent of its total assets and it is not trading in such securities; and
(b) not accepting/holding public deposit.
(iv) These directions shall not apply to an NBFC being a Government company as defined under Section 617 of the Companies Act, 1956 (1 of 1956).
Definitions:
(1) For the purpose of these directions, unless the context otherwise requires:
(iv) 'doubtful assets' means.
(a) a term loan, or
(b) a lease asset, or
(c) a hire purchase asset, or
(d) any other asset, which remains a sub-standard asset for a period exceeding two years.
(vii) 'loss asset' means
(a) an asset which has been identified as loss asset by the NBFC or its internal or external auditor or by the RBI during the inspection of the NBFC, to the extent it is not written off by the NBFC; and
(b) an asset which is adversely affected by a potential threat of non-recoverability due to either erosion in the value of security or non-availability of security 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, where the terms of the agreement regarding interest and/ or principal have been renegotiated or rescheduled after commencement of operations, until the expiry of one year of satisfactory performance under the renegotiated or rescheduled terms;
3. Income recognition--(1) The income recognition shall be based on recognized accounting principles.
(2) Income including interest/discount or any other charges on NPA shall be recognized only when it is actually realized. Any such income recognized before the asset became non-performing and remaining unrealized shall be reversed.
(3) In respect of hire purchase asset where instalments are overdue for more than 12 months, income shall be recognized only when hire charges are actually received. Any such income taken to the credit of P&L a/c before the asset became non-performing and remaining unrealized shall be reversed.
(4) In respect of lease assets, where lease rentals are overdue for more than 12 months, the income shall be recognized only when lease rentals are actually received. The net lease rentals taken to the credit of P&L a/c before the asset became non-performing and remaining unrealized shall be reversed.
8. Provisioning Requirements.-Every NBFC, shall, after taking into account the time between an account becoming non-performing, its recognition as such, the realization of the security and the erosion over time in the value of security charged, make provision against sub-standard assets, doubtful assets and loss assets.
9. Disclosure in the balance sheet-(1) Every NBFC shall, separately disclose in this balance sheet the provisions made as per para 8 without netting them from the income or against the value of assets.
(2) The provisions shall be distinctly indicated under separate heads of account as under:
(i) provisions for bad and doubtful debts; and
(ii) provisions for depreciation in investments.
10. Reading the aforesaid provisions, it emerges that the RBI Act and the Prudential Norms issued in exercise of the powers conferred by Section 45JA of the RBI Act provide mainly for income recognition accounting standards in order to ensure making of proper provision for bad and doubtful debts, capital adequacy based on the risk weightage etc. The provisions of Chapter III-B of the RBI Act before the amendment were in existence for more than three decades. The said provisions, however, vested with very 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 overall borrowing capacity of NBFCs would be restricted by the capital adequacy requirement, maximum ceiling on public deposits which an NBFC can accept is related to its rating and level of NOF. Even as per Clause 8 of the Prudential Norms requiring NBFC to make a provision for NPA required it to make provision even for doubtful assets and even sub-standard assets though the debt has not become bad. All these requirements were for the limited exercise of arriving at the amount of profit which can form part of NOF for the purpose of computing eligible amount of deposit to be accepted. In a way, it was special Act for the purpose of recognizing the income and computing NOF to arrive at the capital adequacy and eligibility to accept deposits. However, under the IT Act, as per Section 36(1)(vii) only the bad debt or part thereof which is written off as irrecoverable in the accounts is allowable as deduction. The IT Act is an Act relating to charge of tax on the income of a person as computed under the provisions of the IT Act is concerned. Thus, both the Acts i.e., the RBI Act and the IT Act operate in altogether different fields. The RBI Act is a special Act in relation to computation of NOF of NBFC whereas IT Act is a special Act so far as computation of tax liability of a person in respect of its income computed under the provisions of the IT Act. Thus, it cannot be said that there is any inconsistency between the two Acts so as to hold that the provision of RBI Act shall have effect notwithstanding anything contained in the IT Act. Though Section 45Q of the RBI Act provides that provisions of Chapter- III-B of the RBI Act shall have effect notwithstanding anything inconsistent therewith contained in any other law, we find that there is no inconsistency between the provision of RBI Act or the Prudential Norms prescribed thereunder and the provisions of the IT Act. Therefore, it cannot be held that the provision made in the accounts of the assessee in respect of NPA shall be treated as sufficient compliance with the provisions of Section 36(1)(vii) of the IT Act so as to allow the provision for bad and doubtful debts as deduction permissible under the IT Act.
11. An argument has been made that the RBI Act overrides the provisions of the IT Act in view of Section 45Q of the RBI Act does not find favour with us. Section 45Q will apply only when there is inconsistency between the two provisions. Having found that there is no inconsistency between the two provisions, Section 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 Section 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 on which we do not have any different opinion. However, these directions issued are for a different purpose i.e., for regulating the working of the NBFC only and that too only those NBFCs accepting public deposits. NBFC is obliged to make the provision in accordance with Prudential Norms. As such provisioning requirement is mandatory so as not to invite any disciplinary action from the RBI as also to continue to accept public deposits. However, when it comes to the provisions of the IT Act, if apart from making a provision for bad and doubtful debts, some additional conditions are required to be fulfilled under the IT Act so as to claim such write off as allowable deduction, the same should also be complied with. This is in view of the proposition that so long as computation of income under the IT Act is concerned, IT Act is a special Act and the provisions contained therein need to be complied with if deduction permissible is to be claimed as allowable. Under the IT Act, the income is to be computed as per the provisions of the IT Act and not under the provisions of the RBI Act or any directions issued thereunder.
12. Under Section 36(1)(viia) even a provision for bad and doubtful debts made by scheduled bank, a non-scheduled bank, a co-operative bank, a foreign bank, a public financial institution, a State financial corporation, a State industrial investment corporation etc., are allowable as such within the limits prescribed therein. If the legislature intended to provide such benefit of allowing provision for bad and doubtful debts to a non-banking finance company also appropriate provision would have been made in respect thereof. However, the NBFC does not find any mention in Section 36(1)(viia). This implies that the benefit of deduction in respect of provision for bad and doubtful debts is not intended to the entities other than the entities prescribed in Section 36(1)(viia). It amounts to "causus omissus", which cannot be supplied by any Court unless it is a case of clear necessity and when reason for it 4s found in the four corners of the statute itself. The 'causus omissus' cannot be readily inferred, it may be inferred when a literal construction of a particular section leads to manifestly absurd result which could not have been intended by the legislature or to avoid any part of the statute becoming meaningless or otiose. Accordingly, it is to be held that a deduction 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 Section 4 of the IT Act. Its object was to give relief and confer benefit on all these units uniformly. We, therefore, cannot read in the provisions of Section 36(1)(vii) of the IT Act anything which entitles even a provision for bad and doubtful debts by an NBFC as an allowable deduction only on the basis of provisioning requirement contained in the directions issued by the RBI in exercise of powers conferred under Section 45JA of the RBI Act.
13. We now examine as to whether provision for NPA debited to P&L a/c can be allowed as deduction while computing income from business under the provisions of IT Act. Under Section 36(1)(vii), only the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts is an allowable deduction. Explanation to Section 36(1)(vii) provides that any bad debt or part thereof written off as irrecoverable shall not include any provision for bad and doubtful debts. The said Explanation was inserted by Finance Act, 2001, with retrospective effect from 1st April, 1989, and hence applicable to asst. yr. 1989-90 onwards. Neither this section nor the Explanation provides the manner of write off in the accounts. Various decisions cited by the assessee in this regard i.e., CIT v. Jwala Prasad Tiwari (supra), Vithaldas H. Dhanjibhai Bardanwala v. CIT (supra), Sarangpur Cotton Mfg. Co. Ltd. v. CIT (supra) still hold good as to the manner of write off in the accounts. Thus if the same is debited to the P&L a/c and corresponding credit is made in the suspense account, it amounts to sufficient compliance of Section 36(1)(vii). The only restriction is that the bad debt and part thereof will not contain any provision for bad and doubtful debts. The provisions for NPA under the RBI directions is not only in respect of loss assets but also doubtful assets and sub-standard assets. Depending upon the period for which the asset has been considered as doubtful, various percentage of the amount is to be provided. Thus, the provisioning requirement under Clause 8 of the Prudential Norms is still in respect of doubtful debts or doubtful assets and not in respect of debt which has turned bad. Thus, though under the Prudential Norms, NBFC is to make a provision even for doubtful assets or doubtful debts, the statutory condition under the IT Act provides that any bad debt or part thereof shall not include any provision for bad and doubtful debts. Thus, so long as the amounts written off is in respect of provision for bad and doubtful debts or provision for NPA or so long as amount provided is not in respect of a bad debt, the same is not allowable as deduction under Section 36(1)(vii). Section 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 Clause 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 a/c 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 Corporation v. Jt. CIT (supra), we hold that the same was On the basis of concession by the counsel appearing on behalf of the assessee. However, the law laid down therein cannot be brushed aside. The concession by the counsel was to the limited extent that in view of Explanation to Section 36(1)(vii), provision for bad and doubtful debts is not an allowable deduction but the Hon'ble Madras High Court went on to hold that merely because RBI has directed the assessee to provide for NPA, that direction cannot override the mandatory provision of the IT Act.
16. For the reasons stated above, there is no error in the order of learned CIT(A) in not allowing provision for NPA debited to P&L a/c. Thus, even ground No. 1 raised in this appeal is to be dismissed.
17. In ground No. 2, an alternate contention has been raised that if deduction claimed in respect of provision for NPA is not admissible, a proper direction be given that as and when this amount is received and shown as income as per RBI's directions in computing the income of subsequent years, the same should be accordingly reduced. We are in agreement with the submissions made in this regard. If the deduction is not allowed in respect of provision for NPA itself, since the amount received is in respect of capital sum lent, it does not partake the character of income when subsequently such amount is realized. If on the first instance, the deduction is not allowed in respect of NPA, subsequent realization of such NPA is realizing its capital itself and hence, cannot be considered as income though treated as such under the RBI Act. The amount recovered is not an income under Section 41(4) unless in the first instance is allowed as deduction under Section 36(1)(vii).
In the result, the question referred to the Special Bench is answered in favour of Revenue and the appeal of assessee is partly allowed.