Income Tax Appellate Tribunal - Hyderabad
Sks Micro Finance Ltd., Hyd, ... vs Addl. Cit, Range-3, Hyd, Hyderabad on 27 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT
AND
SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
I.T.A. No. 1316/HYD/2015
Assessment Year: 2011-12
M/s. Bharat Financial Inclusion The Addl.CIT, Range-3,
Limited, Vs HYDERABAD
(Formerly SKS Microfinance
Limited)
HYDERABAD
[PAN: AAICS2940J]
(Appellant) (Respondent)
For Assessee : Shri K.C. Devdas, AR
For Revenue : Smt. Nivedita Biswas, DR
Date of Hearing : 07-09-2017
Date of Pronouncement : 27-09-2017
ORDER
PER INTURI RAMA RAO, A.M. :
This appeal filed by assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-3, Hyderabad, dated 10-08-2015 for the AY. 2011-12. The appellant raised the following Grounds of Appeal:
"1. That on the facts and in the circumstances of the case, the additions and/or denial of claims and deductions, by the CIT (Appeals)-3, Hyderabad, is unjustified, erroneous and unsustainable both on facts and in Law.
2. The learned CIT(Appeals)-3, Hyderabad, erred in confirming the disallowance of Employee stock expenditure for Rs. 2,10,56,905/-
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3. The learned CIT (Appeals)- 3, Hyderabad, erred in confirming the disallowance of Provision for standard and Non performing assets for Rs.
52,59,85,047/-
4. The Appellant denies it's liability to the levy of Interest u/s. 234-B of the Income Tax Act, 1961.
5. Any other ground that may be urged at the time of hearing of the appeal".
2. Briefly, facts of the case are that the appellant is a company duly incorporated under the Provisions of Companies Act, 1956. IT is engaged in the financial services sector, providing micro finance services to rural poor through Joint Liability Groups. The return of income for the AY. 2011-12 was filed declaring total income of Rs. 1,69,18,54,640/-. Against the said return, assessment was completed by the Addl.CIT, Range-3, vide order dt. 07-03-2014 passed u/s. 143(3) of the Income Tax Act [Act] at a total income of Rs. 2,24,43,78,149/-. While doing so, the Ld.AO disallowed the claim for deduction towards Employee Stock Option Plan (ESOP) of Rs. 2,10,56,905/- and the claim for deduction of provision for standard non-performing assets of Rs. 52,59,85,047/-. The facts set out by the Ld.AO relating to ESOP are as under:
"3.1. Employee Stock Option Plan (ESOP): The assessee company provides ESOPs to all its employees and directors as an incentive to attract, retain and reward the employees working with the company. In the scheme of ESOPs, the employees are allotted stock options at the book value of each share. However, depending upon the performance' of the company, the price of the listed shares at any point of time may be much higher than the book value of the share. When an employee exercises his option and procures the shares of the company at the book value, the company suffers loss to that extent. This is because had the share been allotted to any other person, the company would have got a much higher price since the market price of the share is higher than the book value. This loss suffered by the company is in turn debited to the share premium account. The assessee maintains a separate ESOP allotments for passing the relevant entries. Every year, certain amounts are provided in the accounts towards ESOP allotment (purely provisional) and the same is added back to the income in I.T.A. No. 1316/Hyd/2015 :- 3 -:
the computation. All the employees to whom stock options have been allotted may not exercise the options during the year. Therefore, depending on the actual exercise of the options, the loss suffered by the company is calculated and claimed as expenditure in the computation of income.
3.2. It is seen from the computation for the current year that the assessee has added back an amount of Rs.4.93 crores as "ESOP expenditure disallowed to the extent of options not exercised during the year". From the profit and loss account, it is observed that the actual debit to the profit and loss account is at Rs.7.30 crores. This implies that the assessee has added back the entire provision of Rs.7.30 crores and claimed an amount of Rs.2.10 crores which is the amount of loss suffered by the company on account of stock options being exercised by the employees. The balance amount of Rs.4.93 crores is added back in the computation. The issue is whether the expenditure of Rs.2.10 crores claimed by the assessee as a deduction, is allowable in the computation. The assessee submitted that the loss suffered by the company is a revenue expenditure since ESOP is an incentive given to the employees which is on par with any perquisite or remuneration. However, the assessee's claim is not acceptable. While remuneration and the perquisites fall in the field of revenue expenditure, the expenditure pertaining to the loss suffered by the assessee on allotment of shares is definitely in the capital field. In other words, it is in the process of allotment of shares and collecting of the share premium amounts that the assessee has suffered the loss. In the cases of Brooke Bond India Ltd vs CIT 225 ITR 798 (SC) and CIT vs Punjab State Industrial Development Corporation Ltd 225 ITR 792 (SC), it was categorically held by the Apex Court that any expenditure incurred in connection with the share capital of the company is capital in nature. Therefore, the expenditure claimed by the assessee cannot be allowed as a revenue expenditure and hence, an amount of Rs.2,10,56,905/-, which is the expenditure Incurred by the assessee on account of ESOPs is not allowed and the same is added back to the total income of the assessee, Penalty proceedings u/s.
271(1)(C) of the I.T.Act, 1961 are initiated separately on this issue.
Addition: Rs.2,10,56,905/-"
2.1. As far as provision for standard and non-performing assets as under:
"4.1. Provision for Standard and Non Performing Assets: It is seen from the schedule 19 of the profit and loss account that the assessee has mentioned various provisions and write offs. A specific provision was made by the assessee towards "Standard and Non Performing Assets" of Rs.52.59 crores. However, the said provision was not added back in the computation of income. The assessee was asked to clarify why the said provision was not added back. The assessee made a written submission on the issue, the gist of which is reproduced below:
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The assessee is an NBFC engaged in the business of micro finance and during the financial year 2010-11, a major crises broke out in AP State resulting in an Ordinance being issued by the State Government Assessee's operations were greatly restricted since fresh loans had to be approved by the Government before advancing them to the rural clientele, The field operations were disrupted in most part of the centers and there was drastic fall in the loan repayments from the earlier borrowers. Accordingly, the company made a provision of Rs.52.60 crores which has resulted in the first ever loss suffered by the company in the past seven years of its existence.
4.2. It was submitted that many other players in the same line of business had to even go for a corporate debt restructuring scheme because the banks also greatly reduced their exposure to micro finance sector. It was submitted that the assessee also suffered during the said period.
Thereafter, the company referred to the RBI guidelines and also relied on certain decisions wherein it was held that a provision should be made towards doubtful advances and that such provisions made are deductible under the Act. It was categorically put to the assessee as to whether its claim on the said amount of Rs.52.59 crores was forgone and whether the same has been written off from books. The assessee has confirmed in negative. In other words, the assessee has neither given up its right to receive these amounts nor the said amounts were actually written off from the books. It is purely a provision made by the assessee in its books fearing that the said quantum of amount may not be realized during the year. Therefore, the assessee should have added back the said provision in the computation of income, more so, because if any of these amounts were not realized in the subsequent period, a separate deduction could be claimed under the head 'bad debts'. The Hon'ble Apex Court in the case of State Bank of Patiala vs CIT 219 ITR 706 held as follows:
"If the sums set apart in the balance sheet are only "provisions", the assessee will not be entitled to the relief claimed by it."
4.3. Mere setting aside of any amount does not automatically make it eligible for a deduction. The liability should have actually occurred in view of which a provision could be made. Liability that is to be allowed is that which is actually existing at the time. Putting aside of money which may become expenditure on the happening of any event is not expenditure. It becomes an expenditure only when the liability become a "fait accompli" in any accounting year. Reliance is placed on the following decisions :
1. M/s Shree Sajjan Mills Ltd vs CIT 156 ITR 585 (SC)
2. Mysore Lamps Works Ltd vs CIT 185 ITR 96 (Kar)
3. Indian Molasses Co Pvt. Ltd vs CIT 37 ITR 66 (SC) The facts of the case ace akin to the facts of the cases eeported above. The assessee has merely set aside the amounts fearing that these loans may not be recoverable during the year. The Ordinance issued by the State Government did not make the loans irrecoverable. The Ordinance only I.T.A. No. 1316/Hyd/2015 :- 5 -:
directed that the Government should be consulted before advancing the loans, so that the loans reach the correct (eligible) persons and not the genuine persons. The exposure being reduced by the banks will only affect the assignment of loans by the assessee to the banks. It did not render irrecoverable the loans already disbursed. Considering the same, the provision made for standard and non performing assets of Rs.52.59 crores is disallowed and added back to the total Income of the assessee. Penalty proceedings u/s 271(1)(c) of the I.T.Act, 1961 are initiated separately on this issue.
Addition: 52,59,85,047/-"
and also disallowed a sum of Rs. 54,81,557/- towards advance given to Employees Welfare Trust.
3. Being aggrieved, appellant preferred an appeal before the CIT(A), who vide impugned order had allowed the claim towards the advance given for Employees Welfare Trust following the order of the Hon'ble Tribunal in assessee's own case for earlier years.
4. However, as regards the claim for deduction of ESOP, the claim came to be rejected by the CIT(A) holding to be capital in nature.
4.1. As regards the claim for provision for standard and non-
performing assets, the Ld.CIT(A) placing reliance on the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd., Vs. JCIT [320 ITR 577] (SC) confirmed the disallowance.
Being aggrieved, appellant is in appeal before us in the present appeal.
5. In the present appeal, the appellant raised five grounds of appeal. Out of which, Ground Nos. 1, 4 and 5 are general in nature and does not require any adjudication.
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6. In Ground No. 2, appellant challenges in confirming the disallowance of ESOP of Rs. 2,10,56,905/-.
6.1. Before us, the Ld.AR vehemently contended that this issue is no longer res integra as Special Bench of Bangalore Tribunal in the case of M/s. Biocon Ltd., in ITA 368/Bang/2010 and others dt. 16-07-2013 held that the same is allowable expenditure and this decision was subsequently followed by several Co-ordinate Benches of the Tribunal in the following cases:
i. CIT Vs. PVP Ventures Ltd [211 Taxman 554] (Mad) (HC); ii. Biocon Ltd [114 ITD 21], [251 ITR 602] (Trib) (Bang); iii. Reddy Laboratories Ltd v. Addl.CIT 30 ITR 393 (Hyd) (Trib) ; iv. Biocon Ltd (ITA 368/Bang/2010);
v. Apollo Health Street Ltd v. DCIT (ITA 41/2014 and 132/2014) (Hyd);
vi. S.S.I. Ltd Vs. DCIT [85 TTJ 1049] (Chennai);
vii. ACIT Vs. Spray Engineering Devices Ltd [53 SOT 70] (Chennai) 6.2. On the other hand, Ld.DR placed reliance on the decision of the Co-ordinate Bench of Delhi in the case of Ranbaxy Laboratories Ltd., [124 TTJ 771] (Delhi).
6.3. We have heard the rival submissions and perused the material on record. The issue in the present ground of appeal is whether the expenditure on ESOP is allowable or not? This issue was decided in favour of assessee-company by the Special Bench of Bangalore Tribunal in the case of M/s. Biocon Ltd., in ITA I.T.A. No. 1316/Hyd/2015 :- 7 -:
368/Bang/2010 and others dt. 16-07-2013, where in the Special Bench held as follows:
"(i) The difference (discount) between the market price of the shares and their issue price is "expenditure" in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference between a case where the company issues shares to the public at market price and pays a part of the premium to the employees for their services and another where the shares are directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By undertaking to issue shares at a discount, the company does not pay anything to its employees but incurs the obligation of issuing shares at a discounted price at a future date. This is nothing but "expenditure" u/s 37(1);
(ii) The liability cannot be regarded as being "contingent" in nature because the rendering of service for one year is sine qua non for becoming eligible to avail the benefit under the scheme. Once the service is rendered for one year, it becomes obligatory on the part of the company to honor its commitment of allowing the vesting of 25% of the option. The liability is incurred at the end of the first year though it is discharged at the end of the fourth year when the options are exercised by the employees. The fact that some options may lapse due to non-exercise/ resignation etc does not make the entire liability contingent;
(iii) However, the obligation to issue shares at a discounted premium does not arise at the stage the options are granted. It arises at the stage that the options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme;
(iv) There is likely to be a difference in the quantum of discount at the stage of vesting of the stock options (when the deduction is allowable) and at the stage of exercise of the options. The difference has to be adjusted by making suitable northwards or southwards adjustment at the time of exercise of the option depending on the market price of the shares then prevailing. The fact that the SEBI Guidelines do not provide for the adjustment of discount at the time of exercise of options is irrelevant because accounting principles cannot affect the position under the Income-
tax Act.
(v) On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the options vest equally over a period of four years, the deduction ought to be claimed in four equal installments on a straight line basis (Ranbaxy Laboratories 124 TTJ 771 (Delhi) reversed, S.S.I. Ltd. v. DCIT 85 TTJ 1049 (Chennai) approved, PVP I.T.A. No. 1316/Hyd/2015 :- 8 -:
Ventures 211 Taxman 554 referred. See also Spray Engineering Devices Ltd 53 SOT 70 (Chd)"
6.4. The above decision was subsequently followed by the different Co-ordinate Benches of the Tribunal.
6.5. However, the Co-ordinate Benches of Delhi in the case of Ranbaxy Laboratories Ltd., and Mumbai Tribunal in the case of M/s. VIP Industries Ltd., took a contrary view. However, needless to mention that these decisions were rendered prior to decisions of Special Bench of Bangalore Tribunal in the case of M/s. Biocon Ltd., in ITA 368/Bang/2010 and others dt. 16-07-2013, even assuming that there is divergence in judicial opinion it is trite law that view which is in favour of assessee is to be adopted in view of the law laid down by the Hon'ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd., reported as [88 ITR 192] (SC). Following the ratio of Hon'ble Supreme Court in the said case, we allow this ground of appeal.
7. In Ground No. 3 assessee challenges in confirming the disallowance of provision for standard and non-performing assets for Rs. 52,59,85,047/-
7.1. The Ld.AR submitted that the appellant is NBFC, engaged in the business of micro finance. The appellant provided the provision on non-performing assets in terms of guidelines issued by the RBI and this was claimed as 'deductible expenditure'. The AO disallowed the same holding that it is a contingent expenditure and it cannot be claimed as 'deduction'. The Ld.AR vehemently contended that even otherwise also this claim is allowable as bad debt since the provision was debited to P&L A/c and reduced from I.T.A. No. 1316/Hyd/2015 :- 9 -:
the Sundry Debtors. He placed reliance on the judgment of Hon'ble Apex Court in the case of Vijaya Bank Vs. CIT and another [323 ITR 166] (SC).
7.2. On the other hand, Ld.DR placed reliance on the orders of the lower authorities.
7.3. We have heard the rival submissions and perused the material on record. The issue in the present ground of appeal is squarely covered by the Hon'ble Apex Court in the case of Southern Technologies Ltd., Vs. JCIT [320 ITR 577] (SC), wherein it was held that the provision on non-performing assets and debited to P&L A/c in terms of the guidelines of the RBI governing the income recognition cannot be allowed to be deductible expenditure either u/s. 36(1)(vii) or (viia) and it was further held that the guidelines of RBI does not override the provisions of Income Tax Act, 1961. The relevant paragraph of the said judgment is extracted below:
"Scope and applicability of RBI Directions 1998
32. RBI Directions 1998 have been issued under s. 45JA of RBI Act. Under that section, power is given to RBI to enact a regulatory framework involving prescription of prudential norms for NBFCs which are deposit taking to ensure that NBFCs function on sound and healthy lines. The primary object of the said 1998 Directions is prudence, transparency and disclosure. Sec. 45JA comes under Chapter IIIB which deals with provisions relating to financial institutions, and to non-banking institutions receiving deposits from the public. The said 1998 Directions touch various aspects such as income recognition; asset classification; provisioning, etc. As stated above, basis of the 1998 Directions is that anticipated losses must be taken into account but expected income need not be taken note of. Therefore, these Directions ensure cash liquidity for NBFCs which are now required to state true and correct profits, without projecting inflated profits. Therefore, in our view, RBI Directions 1998 deal only with presentation of NPA provisions in the balance sheet of an NBFC. It has nothing to do with the computation or taxability of the provisions for NPA under the IT Act.
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33. Prior to RBI Directions 1998, advances were stated net of provisions for NPAs/bad and doubtful debts. They were shown at net figure (advances less provisions for NPAs) and the amount of provision for NPA was shown in the notes to the accounts only. Such presentation of NPA provision warranted disclosure. Therefore, para 9(1) of RBI Directions 1998 stipulates that every NBFC shall separately disclose in its balance sheet the provision for NPAs without netting them from the income or against the value of assets. That, the provision for NPA should be shown separately on the "liabilities side" of the balance sheet under the head "Current liabilities and provisions" and not as a deduction from "sundry debtors/advances".
Therefore, 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 para 9 of 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 IT Act. At this stage, we may clarify that the entire thrust of 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 IT Act cannot be conclusively determined by the manner in which accounts are presented in terms of 1998 Directions. There are cases where on facts Courts have taken the view that the so-called provision is in effect a write off. Therefore, in our view, RBI Directions 1998, though deviate from accounting practice as provided in the Companies Act, do not override the provisions of the IT Act. Some companies, for example, treat write offs or expenses or liabilities as contingent liabilities. For example, there are companies which do not recognize mark-to-market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the P&L a/c in terms of Accounting Standards. Consequently, their profits and reserves and surplus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest, they are merely disclosed as contingent liability in the Notes to Accounts. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the IT Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions 1998 and the IT Act operate in different fields.
34. The question still remains as to what is the nature of "Provision for NPA" in terms of RBI Directions 1998. In our view, provision for NPA in terms of RBI Directions 1998 does not constitute expense on the basis of which deduction could be claimed by NBFC under s. 36(1)(vii). Provision for NPAs is an expense for presentation under 1998 Directions and in that I.T.A. No. 1316/Hyd/2015 :- 11 -:
sense it is notional. For claiming deduction under the IT Act, one has to go by the facts of the case (including the nature of transaction), as stated above. One must keep in mind another aspect. Reduction in NPA takes place in two ways, namely, by recoveries and by write off. However, by making a provision for NPA, there will be no reduction in NPA. Similarly, a write off is also of two types, namely, a regular write off and a prudential write off. [See Advanced Accounts by Shukla, Grewal, Gupta, Chapter 26, p. 26.50]. If one keeps these concepts in mind, it is very clear that RBI Directions 1998 are merely prudential norms. They can also be called as disclosure norms or norms regarding presentation of NPA provisions in the balance sheet. They do not touch upon the nature of expense to be decided by the AO in the assessment proceedings.
Theory of "real income"
35. An interesting argument was advanced before us to say that a provision for NPA, under commercial accounting, is not an "income" hence the same cannot be added back as is sought to be done by the Department. In this connection, reliance was placed on "real income theory".
36. We find no merit in the above contention. In the case of Poona Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC) at p. 530, this is what the Supreme Court had to say :
"Income-tax is a tax on the "real income", i.e., the profits arrived at on commercial principles subject to the provisions of the IT Act. The real profit can be ascertained only by making the permissible deductions under the provisions of the IT Act. There is a clear distinction between the real profits and statutory profits. The latter are statutorily fixed for a specified purpose".
37. To the same effect is the judgment of the Bombay High Court in the case of CWT vs. Bombay Suburban Electric Supply Ltd. (1976) 103 ITR 384 (Bom) at p. 391, where it was observed as under :
"Income-tax is a tax on the real income, i.e., profits arrived at on commercial principles subject to the provisions of the IT Act, 1961. The real profits can be ascertained only by making the permissible deductions".
38. The point to be noted is that the IT Act is a tax on "real income", i.e., the profits arrived at on commercial principles subject to the provisions of the IT Act. Therefore, if by Explanation to s. 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written off then, one has to take into account the said Explanation in computation of total income under the IT Act failing which one cannot ascertain the real profits. This is where the concept of "add back" comes in. In our view, a provision for NPA debited to P&L a/c under the 1998 Directions is only a notional expense I.T.A. No. 1316/Hyd/2015 :- 12 -:
and, therefore, there would be add back to that extent in the computation of total income under the IT Act.
39. One of the contentions raised on behalf of NBFC before us was that in this case there is no scope for "add back" of the provision against NPA to the taxable income of the assessee. We find no merit in this contention. Under the IT Act, the charge is on profits and gains, not on gross receipts (which, however, has profits embedded in it). Therefore, subject to the requirements of the IT Act, profits to be assessed under the IT Act have got to be real profits which have to be computed on ordinary principles of commercial accounting. In other words, profits have got to be computed after deducting losses/expenses incurred for business, even though such losses/expenses may not be admissible under ss. 30 to 43D of the IT Act, unless such losses/expenses are expressly or by necessary implication disallowed by the Act. Therefore, even applying the theory of real income, a debit which is expressly disallowed by Explanation to s. 36(1)(vii), if claimed, has got to be added back to the total income of the assessee because the said Act seeks to tax the "real income" which is income computed according to ordinary commercial principles but subject to the provisions of the IT Act. Under s. 36(1)(vii) read with the Explanation, a "write off" is a condition for allowance. If "real profit" is to be computed one needs to take into account the concept of "write off" in contradistinction to the "provision for doubtful debt".
Applicability of Section 145
40. At the outset, we may state that in essence 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 s. 45Q, an overriding effect is given to the Directions 1998 vis-à-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot over-rule the "permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and 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 income. It is well settled that the accounting policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the RBI Directions 1998 in view of s. 45Q of the RBI Act. Hence, as far as income recognition is concerned, s. 145 of the IT Act has no role to play in the present dispute.
Analysis of s. 36(1)(viia) I.T.A. No. 1316/Hyd/2015 :- 13 -:
41. Sec. 36(1)(vii) provides for a deduction in the computation of taxable profits for the debt established to be a bad debt.
Sec. 36(1)(viia) provides for a deduction in respect of any provision for bad and doubtful debt made by a scheduled bank or non-scheduled bank in relation to advances made by its rural branches, of a sum not exceeding a specified percentage of the aggregate average advances by such branches. Having regard to the increasing social commitment, s. 36(1)(viia) has been amended to provide that in respect of provision for bad and doubtful debt made by a scheduled bank or a non-scheduled bank, an amount not exceeding a specified per cent of the total income or a specified per cent of the aggregate average advances made by rural branches, whichever is higher, shall be allowed as deduction in computing the taxable profits.
42. Even s. 36(1)(vii) has been amended to provide that in the case of a bank to which s. 36(1)(viia) applies, the amount of bad and doubtful debt shall be debited to the provision for bad and doubtful debt account and that the deduction shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debt account.
43. The point to be highlighted is that in case of banks, by way of incentive, a provision for bad and doubtful debt is given the benefit of deduction, however, subject to the ceiling prescribed as stated above. Lastly, the provision for NPA created by a scheduled bank is added back and only thereafter deduction is made permissible under s. 36(1)(viia) as claimed.
Whether provision on NPA is allowable under s. 37(1) ?
44. As stated above, s. 36(1)(vii) after 1st April, 1989 draws a distinction between write off and provision for doubtful debt. The IT Act deals only with doubtful debt. It is for the assessee to establish that the provision is made as the loan is irrecoverable. However, in view of Explanation which keeps such a provision outside the scope of "written off" bad debt, s. 37 cannot come in. If an item falls under ss. 30 to 36, but is excluded by an Expln. to s. 36(1)(vii) then s. 37 cannot come in. Sec. 37 applies only to items which do not fall in ss. 30 to 36. If a provision for doubtful debt is expressly excluded from s. 36(1)(vii) then such a provision cannot claim deduction under s. 37 of the IT Act even on the basis of "real income theory" as explained above.
Analysis of Section 43D
45. It is similar to Section 43B.
The reason for enacting this section is that interest from bad and doubtful debts in the case of bank and financial institutions is difficult to recover;
I.T.A. No. 1316/Hyd/2015 :- 14 -:
taxing such income on accrual basis reduces the liquidity of the bank without generation of income.
With a view to improve their viability, the IT Act has been amended by inserting s. 43D to provide that such interest shall be charged to tax only in the year of receipt or the year in which it is credited to the P&L a/c, whichever is earlier.
46. Before concluding, we may state that none of the judgments cited on behalf of the appellant(s) are relevant as they do not touch upon the concept of NPA. In our view, the issues which arise for determination in this case did not arise in the cases cited by the appellant(s)".
The Hon'ble Delhi High Court in the case of Housing & Urban Development Corporation Ltd. vs. Addl. CIT (396 ITR 667)(Del) observed that based on guidelines issued by the Reserve Bank of India governing recognition of income, no deduction can be claimed.
The relevant observations are as under:
".......... A distinction is required to be drawn between the concept of 'deductions' claimed under the Act which has to satisfy the conditions laid down therein to qualify as such and the prudential norms that the NHB Act may lay down for determining an NPA. The present case is similar to Southern Technologies Ltd. (supra) where the Supreme Court had to deal with the claim for deduction on account of the method for determining an NPA and not CIT v. Vasisth Chay Vyapar Ltd. (supra) where this Court was dealing with 'income recognition' which had nothing to do with Section 43D of the Act."
This ground of appeal is dismissed.
8. In the result, appeal of assessee is partly allowed.
Order pronounced in the open court on 27th September, 2017 Sd/- Sd/-
(D. MANMOHAN) (INTURI RAMA RAO)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, Dated 27th September, 2017
TNMM
I.T.A. No. 1316/Hyd/2015
:- 15 -:
Copy to :
1. M/s. Bharat Financial Inclusion Limited, (Formerly SKS Microfinance Limited), C/o. M/s. Sekhar & Co., Chartered Accountants, 133/4, R.P. Road, Secunderabad.
2. The Addl. CIT, Range-3, Hyderabad.
3. CIT (Appeals)-3, Hyderabad.
4. The Pr.CIT-3, Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.