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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 9th May, 2017
Pronounced on: 3rd July, 2017
+ ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 & 446/2016
HOUSING AND URBAN DEVELOPMENT CORPORATION
LIMITED ...Appellant
Through: Mr. Gagan Kumar, Advocate
versus
ADDITIONAL COMMISSIONER OF
INCOME TAX RANGE 12 ...Respondent
Through: Mr. Rahul Chaudhary, Senior Standing
Counsel
CORAM: JUSTICE S. MURALIDHAR
JUSTICE CHANDER SHEKHAR
JUDGMENT
% 03.07.2017
Dr. S. Muralidhar, J.:
1.These are five appeals under Section 260A of the Income Tax Act, 1961
(`Act') by the Housing and Urban Development Corporation Limited
(`HUDCO') against the common judgment and order dated 9 th February,
2016 passed by the Income Tax Appellate Tribunal (`ITAT') in ITA Nos.
1166/Del/2012; 1167/Del/2012; 1168/Del/2012; 3365/Del/2013 and
3366/Del/2013 for the Assessment Years (`AYs') 2005-06 to 2009-10
respectively.
2. By the order dated 6th February, 2017, the only question framed for
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 1 of 12
consideration in these appeals was:
"Whether the ITAT erred in confirming the CIT (A)'s conclusion with
respect to the appellant/assessee's claim of entitlement to deduction on
account of de-recognition of interest accruing upon NPAs, by
applying Rule 6EB of the Income Tax Rules, 1962 which the assessee
claims is contrary to the directions issued by the National Housing
Bank under Section 30A read with 36 of the National Housing Bank
Act, 1987, in the given facts and circumstances of the case."
3. The background facts are that HUDCO is a public sector undertaking
engaged primarily in providing long-term finance for construction of houses
for residential purposes or undertaking housing and urban development
programmes in the country. Each of the returns filed by HUDCO for the
aforementioned AYs was selected for scrutiny and an assessment order
under Section 143(3) was passed under Section 143(2) of the Act. The issue
concerns treatment of the interest corresponding to bad and doubtful debts
known as Non-Performing Assets (`NPAs') in banking terminology.
4. For AY 2005-06, the Assessee claimed deduction in respect of Rs.
54,13,48,468/- accrued on classified NPAs according to the guidelines of
National Housing Bank (`NHB') issued with effect from 31st March, 2005.
In the said guidelines, the debts or loan in respect of which interest had not
been received beyond a period of more than 90 days were classified as NPA.
Relying on the said guidelines, deduction was claimed by HUDCO.
5. The Assessing Officer (`AO'), however, went by Section 43D of the Act
read with Section 6EB of the Income Tax Rules, 1962 (`the Rules')
whereunder only if interest in respect of a debt or loan was due for more
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 2 of 12
than six months could such a loan be treated as NPA. The interest
corresponding to such NPA was only to be considered for deduction for
non-recognition of the interest income. In other words, the AO held that the
NPA was to be classified as per Rule 6EB of the Rules and not by the
amended guidelines of the National Housing Bank (`NHB') effective from
31st March, 2005.
6. In the absence of calculations furnished by HUDCO, the AO allowed
50% of the revenue de-recognition of Rs. 54,13,48,468/- thereby disallowing
Rs. 27,06,74,234/-. This was added back to the income of HUDCO. The
Commissioner of Income Tax (Appeals) concurred with the findings of the
AO and sustained the addition.
7. Similar additions proposed by the AO for the AYs 2006-07, 2007-08,
2008-09 and 2009-10 were likewise confirmed by the CIT(A) with dismissal
of HUDCO's appeals on that issue.
8. By the impugned common order for all the AYs, the ITAT rejected the
contention of HUDCO and held that it was entitled to deduction as per Rule
6EB of the Rules only. However, since the AO had computed the
disallowance only on an estimate basis, the matter was restored to the AO to
compute the deduction strictly in terms of Rule 6EB of the Rules and allow
the deduction accordingly.
9. Mr. Gagan Kumar, learned counsel appearing for HUDCO contended that
its accounts had been maintained in terms of the directions issued by the
NHB and audited by its Statutory Auditor and Comptroller and Auditor
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 3 of 12
General of India (`CAG') without any comments. In other words, the
interest income had been correctly calculated for the AYs in question in
terms of the prevalent revenue recognition norms. Mr. Kumar submitted that
as per Section 36 of the National Housing Bank Act, 1987 (`NHB Act') the
direction of NHB to HUDCO overrides any other law regarding recognition
of income. HUDCO was mandated by law to abide by the
instruction/directions given to it by the CAG in terms of hierarchical
discipline. Therefore, HUDCO could not be penalized for abiding with those
norms. These directions could be issued by the NHB under Section 30A of
the Act and were binding on HUDCO. Specific reference is drawn to
Section 36 of the NHB Act which states that the provisions of Chapter V
relating to `housing finance institutions receiving deposits' would "have
effect notwithstanding anything inconsistent therewith contained in any
other law for the time being in force or any instrument having effect by
virtue of any such law".
10. Mr. Kumar submitted that the CIT(A) as well as the ITAT overlooked
the real income theory and erred in holding that the de-recognition of
interest corresponding to the NPAs would have to be in terms of Rules only.
He pointed out that Section 43D(b) itself requires de-recognition of interest
to be prescribed "having regard to" the guidelines issued by the NHB in
relation to such debts. While Rule 6EB was amended to make it consistent
with the guidelines, fresh guidelines issued with effected from 31st March,
2005 did not result in the corresponding amendment to the Rules. This was
only done as a matter of course. He urged that a purposive construction had
to be adopted and the Rules had to be interpreted in any manner beneficial to
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 4 of 12
the Assessee.
11. Mr Rahul Chaudhary, learned Senior Counsel for the Revenue, on the
other hand, supported the concurrent findings of the AO, CIT(A) and the
ITAT.
12. Section 43-D(b) of the Act reads thus:
"Notwithstanding anything to the contrary contained in any other
provision of this Act,-
(a)...
(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 pubic company to its
profit and loss account for that year or, as the case may be, in which it
is actually received by the institution or bank or corporation or
company, whichever is earlier."
13. This has to be read along with Rule 6EB, which reads thus:
"Rule 6EB Categories of bad or doubtful debts in the case of a
public company under clause (b) of section 43D.
The provisions of clause (b) of Section 43D shall apply in the case of
every public company where its income by way of interest pertains to
the following categories of bad and doubtful debts, namely, -
(a)(i) doubtful asset, that is, a debt which has remained a non-
performing asset of the nature specified in sub clause (ii) for a period
exceeding two years;
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 5 of 12
(ii) non-performing asset referred to in sub clause (i) shall be the
following: -
(1) term loan beyond one year, if the interest amount remain "past
due" for six months or instalment is overdue for more than six
months;
(2) lease rental or hire purchase instalment, if the rental or the
instalment is "past due" for six months;
(3) bill purchased or discounted, if the bill remains overdue and
unpaid for six months; or
(4) any other credit facility in the nature of short term loan or advance
other than those referred to in (1), (2) and (3) above, if any amount to
be received in respect of such a facility remains "past due" for a
period of six months;
(b) loss asset, that is, a debt which has been identified as loss and
considered as uncollectible but has not been written off in the
accounts of the Assessee.
Explanation. For the purpose of this rule, an amount shall be
deemed to be "past due" when it remains unpaid for thirty days
beyond the due date."
14. Further, the relevant provisions of the NHB Act which have a bearing on
the present issue read thus:
"30A. Power of the National Housing Bank to determine policy
and issue directions.-
(1) If the National Housing Bank is satisfied that, in the public interest
or to regulate the housing finance system of the country to its
advantage or to prevent the affairs of any housing finance institution
being conducted in a manner detrimental to the interest of the
depositors or in a manner prejudicial to the interest of the housing
finance institutions, it is necessary or expedient so to do, it may
subject to the provisions of sub-section (5) of section 5, determine the
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policy and give directions to all or any of the housing finance
institution relating to income recognition, accounting standards,
making of 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 housing finance institution or a group of housing finance
institutions or housing finance institutions generally, as the case may
be, and such housing finance institutions shall be bound to follow the
policy so determined and the direction so issued.
(2) Without prejudice to the generality of the powers vested under
sub-section (1), the National Housing Bank may give directions to
housing finance institutions generally or to a group of housing finance
institutions or to any housing finance institution 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
housing finance institution and other relevant considerations, may be
made by that housing finance institution to any person or a company
or to a group of companies.
36. Chapter V 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 or any
instrument having effect by virtue of any such law.
15. While it is true that the Assessee is governed by the instructions issued
by the NHB as to what should be considered as an NPA, the fact remains
that as far as the permissibility of deduction for the purposes of computing
the taxable income is concerned, it is the Act that applies. In the first place,
it requires to be noticed that in terms of clause (b) of Section 43D of the Act,
HUDCO could recognize interest income either on cash basis or accrual
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 7 of 12
basis from "such categories of bad or doubt ful debts as may be prescribed".
The word `prescribe' brings in the Rules. The relevant rule is Rule 6EB. The
statute requires that while prescribing such a rule, regard must be had to the
guidelines issued by the NHB to such debts.
16. Prior to 31st March, 2005 the criteria for terming a loan to be an NPA
remained the same, both, in terms of the NHB guidelines as well as the
Rules i.e., when the interest due thereon was not received for a period of
more than 180 days. After 31st March, 2005, the NHB guidelines mandated
that where the interest on the loan was not received for a period of more than
90 days, it was to be treated as an NPA. However, there was no
corresponding change brought about in Rule 6EB.
17. The question is whether there is an automatic change to be read into
Rule 6EB as and when the guidelines of the NHB are revised? In other
words, is it an instance of incorporation of the NHB guidelines into Rule
6EB by reference? In this context, the expression "having regard to" is
relevant.
18. In Rajesh Kumar v. DCIT (2006) 287 ITR 91, the Supreme Court was
considering the ambit of the expression "having regard to" under Section
142(2A) of the Act which empowers the AO to direct an audit of the
accounts of an Assessee. The Supreme Court held that factors like the nature
of accounts; complexity of accounts and interest of the revenue were an
important criteria but "are not exhaustive" and that while carrying a special
audit "regard must be had also to the factors enumerated therein together
with all factors relevant for the exercise of that power."
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 8 of 12
19. Going by the above interpretation of the Supreme Court, it appears that
the expression "having regard to" occurring in Section 43D(b) of the Act
does not imply that the Rules thereunder have to be identical to the NHB
guidelines. The expression is used as not "in accordance with" but "having
regard to". It cannot be said that the NHB guidelines have to be treated as
having been incorporated into Rule 6EB in the sense that every amendment
or modification in the NHB guidelines has to ipso facto be read into Rule
6EB.
20. This conclusion also draws support from the decision of the Supreme
Court in Southern Technologies Ltd. v. Asstt. CIT [2010] 320 ITR 577
(SC) which held that the RBI Act does not override the provisions of the
Act. The Court reconciled the said judgment with the decision in TRO v.
Custodian appointed under the Special Court (Trial of Offences relating to
Transaction in Securities) Act, 1992 [2007] 293 ITR 369 (SC) which held
that where an Act makes a provision with a non-obstante clause, that would
override the provisions of all other Acts.
21.1 In CIT v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 (Del.), the
Court was concerned with the concept of income recognition. In that case,
the Assessee was a non-banking financial company which had advanced
certain Inter-Corporate Deposits (`ICDs') to a company 'S'. No interest was
received on such deposits for more than six months. In terms of directions
given by RBI, the Assessee treated the said ICDs as NPAs. It did not
disclose interest income thereon which, according to it, was not realizable.
The AO, however, added the interest as income of the Assessee holding that
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 9 of 12
it had 'accrued' to the Assessee since the Assessee was following the
mercantile system of accounting. The AO held that the provisions of the
Reserve Bank of India Act (`RBI Act') read with NBFCs Prudential Norms
(Reserve Bank) Directions, 1998 could not have overridden the provisions
of the Act in terms of which the amount of interest was taxable under the
accrual system of accounting. After the CIT(A) affirmed the order of the
AO, the matter travelled to the ITAT which held that no such addition could
be made.
21.2 The Revenue's appeal raised two questions, one of which is whether
the RBI guidelines would override the provisions of the Act. It was held that
the directions issued by the RBI under the RBI Act and the Act (i.e., the
Income Tax Act) operated in different areas. It was held that the RBI
directions had nothing to do with computation of taxable income and could
not overrule the "permissible deductions" or "their exclusion" under the Act.
It was held that the Accounting Policies adopted by an NBFC could not
determine the taxable income. Given the wording of Section 45Q of the RBI
Act, which states that the provisions of that Chapter "shall have effect
notwithstanding anything inconsistent therewith contained in any other law
for the time being in force or any instrument having effect by virtue of any
such law", it was held that it was a case where the AO had to follow the
1998 RBI Directions since as far as income recognition was concerned,
Section 145 of the Act had "no role to play".
22. In the present case, there is no doubt that Section 36 of the NHB Act
states that the provisions of Chapter V of the NHB Act would have the
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 10 of 12
effect notwithstanding anything inconsistent therewith contained in any
other law for the time being in force. However, Section 30A of the NHB Act
under which directions are issued by NHB to housing financial institutions,
etc. does not contain a non-obstante clause. It is not meant to override
Section 43D(b) of the Act in the matter of computation of taxable income.
23. Section 43D of the Act read with Rule 6EB is a complete Code in itself.
There is an element of discretion for the rule making authority to follow or
not to follow the NHB guidelines as and when they are revised. The purpose
of classification of debts as NPA by the NHB and the purpose for non-
recognition of income for the purposes of the Act are different. Given the
wording of the relevant provisions of the Act and the NHB Act, it is not
possible to agree to HUDCO's proposition that with every change in the
NHB guidelines there would be a corresponding automatic change in Rule
6EB.
24. Even otherwise, as pointed out by the ITAT, the real income principle
would have no application as far as Section 43D of the Act. 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. v. CIT
(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.
ITA Nos.440/2016, 442/2016, 444/2016, 445/2016 &446/2016 Page 11 of 12
25. Consequently, the question framed by the Court is answered in the
negative i.e., in favour of the Revenue and against the Assessee.
26. The appeals are accordingly dismissed, but in the circumstances, no
orders as to costs.
S.MURALIDHAR, J
CHANDER SHEKHAR, J
JULY 03, 2017
rd
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