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2010 Supreme(SC) 39
2010 (1) Supreme 385
SUPREME COURT OF INDIA
Civil Appellate/Original Jurisdiction
Hon’able Mr. Justice S.H. Kapadia and Hon’able Mr. Justice Aftab Alam, J.J.
M/s Southern Technologies Ltd. — Appellant(s)
versus
Joint Commnr. of Income Tax, Coimbatore — Respondent(s)
Civil Appeal No. 1337/2003
Decided on : 11-01-2010
with
C.A.No. 154 /2010 @ SLP(C) No. 22176/2009
Transferred Case No. 5/2005 & 6/2005
Vivek Tankha, ASG, Arvind Datar, Dr. Bebi Prosad Pal, Sr. Advs., Ms. Radha Rangaswamy, MS. Pritesh Kapur, J. Balachander, K. V. Mohan, Ananda Sen, Dayan Krishnan, N.L. Rajah, Gautam Narayan, Nikhil Nayyar, Mrs. Lakshmi Iyengar, AshokK. Srivastava, Arijit Prasad, C.V.S. Rao, B.V. Balaram Das, Advs., with them for the appearing parties.
IMPORTANT POINT
RBI Directions 1998 are only Disclosure Norms. Section 36(1)(viia) and Section 43D of the IT Act are intra vires.
Headnote:(a) Income Tax Act – Section 145 – It indicates how the taxable income should be arrived at vide Sections 14 to 59 – It is not an assessment Section. (Para 12)
(b) Income Tax Ac6t – Section 36(1)(vii) – Prior to 1.4.1989 even a provision could be treated as a write off and be deductible – After 1.4.1989, a mere provision for bad debt would not be entitled to deduction. 24 ITR 537; V 130 ITR 95; 155 ITR 152 at 157 – Relied upon (Paras 26 and 31)
(c) RBI Act, 1934 – Section 45JA – 1998 Directions – P&L Account prepared by NBFC in terms of the Directions does not recognize “income from NPA” – It directs a Provision to be made in that regard and hence an “add back”. (Para 29)
(d) RBI Act, 1934 – Section 45JA – RBI Directions – 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 Section 36(1)(vii) of IT Act. (Para 34)
(e) RBI Act, 1934 – Section 45JA – RBI Directions – These are merely prudential norms which can also be called disclosure norms or norms regarding presentation of NPA Provisions in the Balance Sheet – They have nothing to do with computation of total taxable income under the IT Act or with the accounting treatment – They do not touch upon the nature of expense to be decided by the AO in the assessment proceedings. (Paras 22, 33 and 34)
(f) Real income theory – Income tax is tax on real income – There is a clear distinction between the real profits and statutory profits. I, 57 ITR 521 – Relied upon 103 ITR 384 – Cited with approval (Para 36)
(g) Income Tax Act – Section 36(1)(vii) – A provision for NPA debited to P&L Account under the 1998 RBI Directions is only a notional expense – Therefor, there would be add back to that extent in the computation of total income under the Act. (Para 38)
(h) Income Tax Act – Section 36(1)(vii) – A debit which is expressly disallowed by Explanation to Section 36(1)(vii), if claimed, has got to be added back to the total income of the assessee. (Para 39)
(i) RBI Act – Section 45Q – In view of section 45Q, the AO has to follow the RBI Directions 1998 – Hence section 145 of the IT Act has no role to play in income recognition. (Para 40)
(j) Income Tax Act – Section 37 – If an item falls under Sections 30 to 36, but is excluded by an Explanation to Section 36(1)(vii) then Section 37 will not apply. (Para 45)
(k) Income Tax Act – Section 43D – Accruable interest from bad and doubtful debts shall be charged to tax only in the year of receipt or the year in which it is credited to the P&L Account, whichever is earlier. (Para 47)
(l) Income Tax Act – Sections 36(1)(viia) and 43D – The concepts of “risk” and “liquidity” bring out the basic difference between NBFCs and Banks – Line of business operations of NBFCs and banks are quite different – Therefore the allowances of the nature mentioned in Sections 36(1)(viia) and 43D are often restricted to banks and not to NBFCs – Lastly even in the case of banks the Provision for NPA has to be added back and only thereafter deduction under Section 36(1)(viia) can be claimed by the banks – Therefore neither Section 36(1)(viia) nor Section 43D violates Article 14 or 19. (Paras 52 and 53)
(m) Interpretation of Statutes – A statute cannot be struck down on the apprehension of possibilities of its abuses. (1981) 4 SCC 675 – Relied upon (Para 55)
(n) Interpretation of Statute – Test of reasonableness, wherever prescribed, should be applied to each individual statute. (2000) 5 SCC 471; 1952 SCR 597– Relied upon (Para 57)
(o) RBI Act, 1934 – Section 45JA – When an economic activity is to be valued, it is open to the law makers to take into account various factors like public investments, disclosure and transparency in the matter of maintenance of accounts, reflection of true and correct profits, etc. – NBFCs Prudential Norms (Reserve Bank) Directions, 1998 are not invalid. 2005 (1) All ER 97 – Relied upon (Para 58)
Facts of the case :
1. For the accounting year ending 31.03.1998, Assessee debited Rs.81,68,516/- as Provision against NPA in the P&L Account on three counts, viz., Hire-Purchase of Rs. 57,38,980/-, Bill Discounting of Rs. 12,79,500/- and Loans and Advances of Rs. 31,84,701/-, in all, totalling Rs.1,02,03,121/- from which AO allowed deduction of Rs. 20,34,605/- on account of Hire Purchase Finance Charges leaving a balance provision for NPA of Rs. 81,68,516/-.
2. Assessee claimed deduction in respect of TR 95, the ITAT held that since Assessee had debited the said sum of Rs. 81,68,516/- to the P&L Account it was entitled to claim deduction as a write off under Section 36(1)(vii) which view was not accepted by the High Court.
Finding of the Court :
RBI Directions 1998 are only Disclosure Norms. If an item falls under Sections 30 to 36, but is excluded by an Explanation to Section 36(1)(vii) then Section 37 will not apply. Section 36(1)(viia) and Section 43D are intra vires.
Result : Appeals dismissed.
JUDGMENT
S.H. Kapadia, J.
Leave granted in the Special Leave Petition. Introduction
2. An interesting question of law which arises for determination in these Civil Appeals filed by Non-banking Financial Companies (“NBFCs” for short) is: “Whether the Department is entitled to treat the “Provision for NPA”, which in terms of RBI Directions 1998 is debited to the P&L Account, as “income” under Section 2(24) of the Income Tax Act, 1961 (“IT Act” for short), while computing the profits and gains of the business under Sections 28 to 43D of the IT Act?” Facts
3. For the sake of convenience, we may refer to the facts in the case of M/s. Southern Technologies Ltd. [Civil Appeal No. 1337 of 2003].
4. At the outset, it may be stated that categorization of assets into doubtful, sub-standard and loss is not in dispute.
5. The financial year of the Appellant is July to June and the P&L Account and the Balance Sheet are drawn as on 30th June. The P&L Account and Balance Sheet is for shareholders, Reserve Bank of India (RBI) and Registrar of Companies (ROC) under the Companies Act, 1956. However, for IT Act, a separate P&L Account is made out for the year ending 31st March and the Balance Sheet as on that date is prepared and submitted to the Assessing Officer(AO) for computing the Total Income under the IT Act, which is not for use of RBI or ROC.
6. For the accounting year ending 31.03.1998, Assessee debited Rs. 81,68,516/- as Provision against NPA in the P&L Account on three counts, viz., Hire-Purchase of Rs. 57,38,980/-, Bill Discounting of Rs. 12,79,500/- and Loans and Advances of Rs. 31,84,701/-, in all, totalling Rs. 1,02,03,121/- from which AO allowed deduction of Rs. 20,34,605/- on account of Hire Purchase Finance Charges leaving a balance provision for NPA of Rs. 81,68,516/-.
7. Before the AO, Assessee claimed deduction in respect of Rs. 81,68,516/- under Section 36(1)(vii) being Provision for NPA in terms of RBI Directions 1998 on the ground that Assessee had to debit the said amount to P&L Account [in terms of Para 9(4) of the RBI Directions] reducing its Profits, contending it to be write off. In the alternative, Assessee submitted that consequent upon RBI Directions 1998 there has been diminution in the value of its assets for which Assessee was entitled to deduction under Section 37 as a trading loss. This led to matters going in appeal (s). To conclude, it may be stated that following the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. Commissioner of Income-Tax,1 Gujarat-V 130 ITR 95, the ITAT held that since Assessee had debited the said sum of Rs. 81,68,516/- to the P&L Account it was entitled to claim deduction as a write off under Section 36(1)(vii) which view was not accepted by the High Court, hence, this batch of Civil Appeal (s) are filed by NBFCs. Submissions
8. Appellant made “Provision for NPA” amounting to Rs. 81,68,516/- for the financial year ending 31st March, 1998. This was calculated as per Para 8 of the Prudential Norms 1998. Accordingly, the P & L Account was debited and corresponding amount was shown in the Balance Sheet. The Department sought to add back Rs. 81,68,516/- to the taxable income on the ground that the provision for bad and doubtful debt was not allowable under Section 36(1)(vii) of the IT Act. The appellant claimed that the “Provision for NPA”, however, represented “loss” in the value of assets and was, therefore, allowable under Section 37(1) of the IT Act. This claim of the appellant was dismissed on the ground that the provisions of Section 36(1)(vii) of the IT Act could not be by-passed.
9. The basic submission of the appellant in the lead case before us was that an amount written off was allowable on the basis of “real income theory” as well as on the basis of Section 145 of the IT Act. In this connection, the appellant submitted that it was bound to follow the method of accounting prescribed by RBI in terms of Paras 8 and 9 of the Prudential N
