New India Industries Ltd. vs ACIT
Citation 2007 18 SOT 51
Bad debts - Provisions made for non-performing assets
The assessee was non-banking financial corporation registered with RBI. The provision made by it for non-performing assets as per RBI's norms could not be allowed deduction as bad debt.
ITAT, Delhi
New India Industries Ltd. vs ACIT
I.T.A. No. 3958/Del/2003, Assessment Year - 2001-02
P.N. Parashar, P.M. Jagtap, and Deepak R. Shah, JJ
26 October 2007
O.S. Bajpai and Deepak Mehra, for the Appellant
G.K. Maheshwari and Shantanu Dhamija for the Respondent
ORDER
Per Deepak R. Shah, A.M
Hon'ble President under the powers conferred on him u/s 255(3) of the Income-tax 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 profit and loss account and claimed as a deduction in accordance with the prudential norms issued by the RBI in exercise of powers conferred on it under section 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 Income-tax 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 profit and loss account, being provision for Non Performing Assets (NPA). The assessee submitted that being a 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 profit and loss account 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 profit and loss account. The assessee relied on the decision of Chennai Bench of the ITAT in the case of Overseas Sanmar Financial Ltd., 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 Income-tax 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 Income-tax Act and the provision for NPA is neither an expenditure nor an allowance which are permitted deductions u/s 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 Ld. CIT(A) erred in fact and in law in not allowing provision for non performing assets amounting to Rs. 6,38,758/- debited to profit and loss account 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 judgment the Tribunal have 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 Income-tax Act:
1. TTA No. 1912/Del/2002 M/s Hindustan Commercial Investment Trust Ltd. vs DCIT (ITAT Delhi benches)
2. TEDCO Investment and Financial Services P. Ltd. vs DCIT, 87 ITD 298 (Del)
3. Overseas Sanmar Financial Ltd. vs JCIT, 86 ITD 602 (Chennai)
However, in following cases a contrary view has been adopted:
1. Concepta Cables Ltd. vs Addl. CIT, 101 ITD 143;
2. India Equipment Leasing Ltd. vs JCIT (cross appeals) in ITA No. 1978/MDS/2000 and ITAS No. 2021/MDS/2000 dated 10.3.2006.
Accordingly, a reference was made to Hon'ble President to constitute a Special Bench to resolve the conflict. Hon'ble President, ITAT, constituted this Special bench to which the aforesaid question was referred and the entire appeal was also to be disposed off.
7. Learned counsel for assessee Shri Bajpai firstly submitted that in the Income-tax Act, special provision is made for a scheduled bank or a non scheduled bank or a cooperative bank or by financial institution or state financial corporation etc. for allowing provision for bad and doubtful debits as per sub clause (viia) of sub section (1) of Section 36. However, there is no provision made similarly for a NBFC even though both are governed by the regulatory directions of RBI. He further submitted that u/s 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 a 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 IIIB of Reserve Bank of India Act, 1934 (in short 'RBI Act'), the provisions relating to non banking institution receiving deposits and financial institutions are contained. As per provisions of Section 45H of RBI Act, Chapter IIIB do not apply to the State Bank or banking company defined in Banking Regulation Ac, 1945 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 Reserve Bank may give directions to NBFC generally or to a class of NBFC or even to a NBFC individually. As per Section 45Q of RBI Act, the provisions of Chapter IIIB 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 provision of RBI Act contended that the RBI Act shall have overriding effect over the provision of the Income-tax Act to the extent the provisions of Income-tax Act are inconsistent with the provision 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 dated 31.1.1998) (hereinafter referred to as Prudential Norms). He invited our attention to the relevant clauses of the Prudential Norms to suggest that the appellant being a 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 vs Ajanta Electricals (1995) 215 ITR 114 (SC);
2. S.K. Lukman All vs Collector, AIR 1989 Orissa 191 NOC;
3. State of UP vs. Babu Ram, AIR 1961 Supreme Court 751;
4. C. Ramkonda Reddy vs State, AIR 1989 AP 235
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 provision in different statutory enactments, the special provision shall prevail over the general provision. The Income-tax 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 are not provided for or even where there is no inconsistency between the two legislations. For this propositions, he relied upon following case laws:
1. Jain Ink Mfg. Co. vs LIC of India, AIR 1981 SC 670;
2. Ashoka Marketing Ltd. vs. Punjab National Bank, AIR 1991 SC 855
3. S.I. Corpn (P) Ltd. vs. Secy. Board of Revenue, AIR 1964 SC 207;
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 u/s 36(1)(vii) of the Act read with Section 36(2) of the Act. As per Section 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 accounts 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)(viia) do 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 vs. Jwala Prasad Tiwan (1953) 24 ITR 537 (Bom)
2. Vithaldas Dhanjibhai Bardanwala vs CIT (1981) 130ITR95(Guj)
3. Sarangpur Cotton Manufacturing Co. Ltd. vs. CIT (1983) 143 ITR 166 (Guj)
4. CIT vs. Union Carbide India Ltd. (1995) 79 Taxman 605 (Cal)
5. CIT vs. Srrinayaga Pictures (1986) 161 ITR 65 (Mad)
6. Hongkong and Shanghai Banking Corporation vs CIT (1955) 28 ITR 199 (Cal)
7. CIT vs. United Bank of India (1993) 115 CTR (Cal) 35
8. Industrial Credit and Investment Corporation of India Ltd. vs IAC (1990) 32 ITD 315 (Bom)
9. State Bank of Bikaner and Jaipur vs DCIT (2000) 74 ITD 203 (JP)
He submitted that if provision is made for an un-named 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 (252 ITR (ST) 65 at page 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 vs JCIT, 291 ITR 519 at page 521. He thereafter submitted that since the only prohibition while allowing deduction u/s 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 profit and loss account and corresponding credit to the Bad Debt Provision Account, it will amount to a sufficient compliance for claiming deduction u/s 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 u/s 36(1)(vii).
7.3 Shri Bajpai further submitted that the decision of Hon'ble Madras High Court in the case of TN Power Finance and Infrastructure Corporation Ltd. vs DCIT, 280 ITR 491 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. vs. JCIT in TC Appeal No. 1/2002 dated 23.1.2002 was also on the basis of concession. The court was not called upon to consider the provisions of RBI Act vis-a-vis Income-tax Act and also to consider as to whether RBI Act shall have overriding effect over the general provision of Income-tax Act. The decision of ITAT, Chennai Bench in the India Equipment Leasing has followed jurisdictional High Court decision. Since the said decision of Hon'ble Madras High Court were based on concession and without discussing the overriding provision of RBI Act, the ruling of the Tribunal India Equipment Leasing (supra) may not be followed. As regards the decision of ITAT in the case of Concepta Cables (supra), Shri Bajpai submitted that the conflict existing between the direction of RBI and the provisions of Income-tax 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 decision as to the method of the write off is incorrect and hence, the ruling of the Tribunal in Concepta Cables Ltd. (supra) is not a good law. He accordingly pleaded that the decisions of the Tribunal in the case of TEDCO Investments (supra) and Overseas Sanmar (supra) needs to be followed and the claim of the assessee be allowed.
8. Shri G.K. Maheshwari, learned CIT and Shri Dhamija, learned Sr, DR, appearing for the revenue submitted that guidelines issued by the RBI under delegated power u/s 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 of the Constitution of India and Delhi Law Act {AIR 1951 (Supreme Court) 332)
b) Compulsory provisions will always control discretionary provisions as held in the case of LIC vs. S.V. Oak, AIR 1965 Supreme Court 975 page 980 and South India Corporation vs Secretary Board of Revenue, Trivandarum (AIR 1964 Supreme Court 207 page 215). Shri Maheshwan further submitted that all the decisions compiled by learned counsel of assessee on the non-obstante clause being AIR 1981 (Supreme Court) 670, AIR (1991) (Supreme Court) 207 and AIR 1965 (Supreme Court) 975 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 over-riding 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 Income-tax Act. Thus, both the RBI Act and Income-tax 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 Income-tax 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 Income-tax is a general Act with reference to banking activities. However, for the purpose of computation of income, the provisions of Income-Tax 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 vs 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 "causus 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. vs CIT, 108 ITR 345 (Supreme Court);
b) CWT vs. K.S. Vaidhyanathan, 153 ITR 11 (Mad);
c) Padma Sundra Rao (Deed) and Ors vs State of Tamil Nadu, 255 ITR 147 (Supreme Court);
d) ACIT vs Vellappa Textiles Ltd., 263 ITR 550 (Supreme Court);
e) Prakashnath Khanna vs CIT, 266 ITR I (Supreme Court).
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 TN Power and Finance Infrastructure Development 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 can not be cut down by resort to non obstante clause as held in AIR 1992 Supreme Court 81. The Supreme Court in AIR 1979 Supreme Court 984 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 Income-tax 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 statement are to be prepared by the NBFC's as per the RBI guidelines. These guidelines are not binding on the income-tax 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 Income-tax Act. He submitted that the decision in favour of the assessee are distinguishable. In the case of TEDCO Investment (supra), it is distinguished on following grounds:
(i) Income-tax 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 u/s 45JA while in the instant case provisions for NPA was made as bad and doubtful debts and debited to profit and loss account. The allowability of provisions u/s 36(1)(vii) was not an issue before the Tribunal.
(iii) The decisions in the case of TEDCO pertained to asstt. year 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. 1.4.1989.
The decision of Tribunal in Overseas Sanmar (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 Income-tax Department. However, the instructions issued by the CBDT in consultation with the RBI dated 21s1 May, 2007 have clarified that the RBI guidelines does not involve any Income-tax 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 Asstt. Years 1995-96 and 1996- 97 and decision is prior to insertion of Explanation to Section 36(1)(vii) of the Income-tax 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 M/s TN Power Finance and Infrastructure Development Corporation Ltd. vs JCIT, 208 ITR 498 and that of Southern Technologies Ltd. (Tax Case No 1 of 2002 dated 23.1.2002). 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 vs. Smt Nirmala Bai K. Dareckar, 186 ITR 242 (Bom), (ii) CIT vs Smt. Godavari Saraf, 113 ITR 589 (Bom). In CIT vs. Maganlal Mohal Lal (HUF) 210 ITR 580, Hon'ble Gujarat High Court following 186 ITR 242 (Bom) held that Tribunal is bound to follow sole judgment of different State High Court if there are no contrary judgments on the point. In the case of UIAC vs. Bareilly Corporation Bank, 27 ITD 1 (Del), the Tribunal held that when there is a conflict between observations made by ITAT 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 anther State particularly when there is no other High Court decision available on that point. Reference was made to the decisions in Sayaji Iron Works (Quarry) P. Ltd vs ITO, 36 TTJ (AM) 645; Justice Kuldip Singh vs ITO, 46 ITD 251 (Chd). ITO vs. P.M. Suthar, 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, nothwithstanding 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 hierarchial 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 Vijay Kumar vs UOI, 151 ITR 48, 60, 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., 125 ITR 425 (Del). He further submitted that the decision of ITAT in TEDCO (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 para 9.1 to 9.8 has held that the claim of bad debt is not allowable. He accordingly pleaded that the decision of ITAT, Delhi in the case of TEDCO Investments is not an authority for the proposition that provision for NPA in accordance with Prudential Norms is an allowable deduction u/s 36(1)(vii) of the Act. Concluding his arguments, Shri Maheshwari submitted that in respect of computation of income, the Income-tax Act is a Special Act whereas for computing the net owned fund for the purpose of accepting deposit from public by a 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 u/s 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 provision 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 cooperative bank other than a primary agricultural credit society or a primary cooperative 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 VIA) 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 VIA).
(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 VIA).
Section 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 hereof 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 day of April, 1988, or any earlier assessment year), but the Assessing Officer 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 day of April, 1988, or any earlier assessment year) and the Assessing Officer 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 Reserve Bank of India 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 profit and loss account 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 IIIB 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 IIIB to override other laws: 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 lacs 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 lakh 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 paragraph 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 lakh 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 u/s 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 substandard 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 Reserve Bank of India 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 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 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 profit and loss account 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 profit and loss account 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 paragraph 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 provision, 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 IIIB 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 in as much 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 Chapter IIIB 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 Income-tax 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 Income-tax Act is an act relating to charge of tax on the income of a person as computed under the provisions of the Income-tax Act is concerned. Thus, both the Acts i.e. the RBI Act and the Income-tax Act operate in altogether different fields. The RBI Act is a Special Act in relation to computation of NOF of NBFC whereas Income-tax 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 Income-tax 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 Income-tax Act. Though Section 45Q of the RBI Act provides that provisions of Chapter IIIB 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 Income-tax 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 Income-tax Act so as to allow the provision for bad and doubtful debts as deduction permissible under the Income-tax Act.
11. An argument has been made that the RBI Act overrides the provisions of the Income-tax Act in view of Section 45Q of the RBI Act do 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 Income-tax 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 45 JA 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 Non Banking Financial Companies 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 Income-tax Act, if apart from making a provision for bad and doubtful debts, some additional conditions are required to be fulfilled under the Income-tax 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 Income-tax Act is concerned, Income-tax 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 Income-tax Act, the income is to be computed as per the provisions of the Income-tax Act and not under the provisions of the RBI Act or any directions issued thereunder.
12. Under section 36(3)(viia) even a provision for bad and doubtful debts made by schedule bank, a non scheduled bank, a cooperative 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 do not find any mention in Sec. 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 Sec.36(1)(viia). It amounts to "causes omissus", which cannot be supplied by any court unless it is a case of clear necessity and when reason for it is found in the four corners of the statute itself. The 'causes 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 do not distinguish between a non banking finance co. accepting the public deposits which is governed by the Prudential Norms issued by RBI and other non banking finance companies or even other persons chargeable to tax under the Income-tax 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 assessee. 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 income-tax u/s 4 of the Income-tax Act. Its object was to give relief and confer benefit on all these units uniformally. We, therefore, cannot read in the provisions of Section 36(1)(vii) of the Income-tax Act anything which entitles even a provision for bad and doubtful debts by a 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 u/s 45JA of the RBI Act.
13. We now examine as to whether provision for NPA debited to profit and loss account can be allowed as deduction while computing income from business under the provisions of Income-tax 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 1.4.89 and hence applicable to Act, 2001 with retrospective effect from 1.4.89 and hence applicable to Asstt. Year 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. Jwala Prasad Tiwari (supra), Vithal Das Bardanwala (supra), Sarangpur Cotton Manufacturing Co. (supra) still hold goods as to the manner of write off in the accounts. Thus if the same is debited to the profit and loss account 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 Income-tax 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 u/s 36(1)(vii). Section 36(1)(vii) provides for allowance of 'bad debt' and not 'any debt'. Thus, the pre condition 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 claus e8 of the Prudential Norms issued by the RBI. In our opinion, it will not materially alter the situation as the amount debited to profit and loss account 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 Income-tax Act is complied with, deduction under the Income-tax Act is not permissible.
14. As regards various decisions of the Tribunal cited by both the counsels, 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 TN Power Finance and Infrastructure Development (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 Income-tax 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 profit and loss account. 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 do 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 u/s 41(4) unless in the first instance is allowed as deduction u/s 36(1)(vii).
18. In the result, the question referred to the Special bench is answered in favour of revenue and the appeal of assessee is partly allowed.
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