Southern Technologies Ltd. vs Joint Commnr. of Income Tax, Coimbatore

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2010 Supreme(SC) 36

Supreme Court of India
THE HONOURABLE MR. JUSTICE S.H. KAPADIA & THE HONOURABLE MR. JUSTICE AFTAB ALAM
M/s Southern Technologies Ltd.
Versus
Joint Commnr. of Income Tax, Coimbatore
CIVIL APPEAL NO. 1337 of 2003 with C.A.No. 154 /2010 @ SLP(C) No. 22176/2009 TRANSFERRED CASE NO. 5/2005 & 6/2005
Decided on : 11-01-2010

Advocates appeared:
For the Appearing Parties:Vivek Tankha, ASG, Arvind Datar, Dr. Debi Prosad Pal, Sr. Advocates, Ms. Radha Rangaswamy, Ms. Pritesh Kapur, J. Balachander, K.V. Mohan, Ananda Sen, Dayan Krishnan, N.L. Rajah, Gautam Narayan, Nikhil Nayyar, Mrs. Lakhsmi Iyengar, Ashok K. Srivastava, Arijit Prasad, C.V. S. Rao,
B.V. Balaram Das, Advocates.

Headnote:(a) RBI Directions 1998 – Only Disclosure Norms – Nothing to do with computation of Total Taxable Income under IT Act, 1961 or with the accounting treatment – Only lay down manner of presentation of NPA provision in balance sheet of an NBFC. (Para 21, 22)
       (b) Income Tax Act, 1961 – Section 36(1)(vii) – After 1.4.1989 – Debiting "provision for doubtful debt" to the P&L Account – Making corresponding credit to "current liabilities and provisions" on the Liabilities side of balance sheet – Constitutes provision for doubtful debt – Such provision not entitled to deduction. (Para 24)
       24 ITR 537; 130 ITR 95 – Referred
       (c) RBI Directions 1998 – "Bad debts/ Advances Written Off" – Distinct head of expenditure vis-à-vis "Provision for Bad Debt" – Accordingly, NPA provisions presented in the Balance Sheet of an NBFC – Nothing to do with the computation or taxability of NPA provisions under the IT Act (Para 25, 35)
       (d) Companies Act, 1956 – Schedule VI, Part I – “Sundry debtors/ loans” and "provision for doubtful debts" – Matters of Presentation of Provisions for doubtful debts – Have nothing to do with taxability under the IT Act. (Para 25)
       (e) Income Tax Act, 1961 – Section 36(1)(vii) and 36(2) – Section 36(1)(vii) is subject to section 36(2) – Amount of debt should be taken into account in computing income . (Para 26)
       155 ITR 152 – Relied upon
       (f) Income Tax Act, 1961 – RBI Directions 1998 – Both operate in in different fields – Charging and debiting interest to borrower’s account is recognized under accrual system, under the IT Act – Not so recognized under the 1998 Directions – Therefore there would be add-back of "provision for doubtful debt" presented under the Directions, but not under the IT Act necessarily – Assessee has to prove that interest is not recognized or taken into account due to uncertainty in collection of the income. (Para 32)
       (g) Interpretation of statutes – IT act and RBI Directive 1988 – RBI Directions 1998 – Deviate from accounting practice as under Companies Act – But do not override IT Act – Both operate in different fields, (Para 34)
       (h) Income Tax Act, 1961 – Section 36(1)(vii) – Para 9, RBI Directions 1998 – "Provision for NPA" under Directions 1998 – Do not constitute expenses entitling assessee to deductions u/s 36(1)(vii) – Reduction in NPA – Recoveries – Write off – Regular write off – Prudential write off (Para 35)
       (i) Income Tax Act, 1961 – Section 36(1)(vii), Explanation – Bad debt written off – Doubtful debt not written off – Only a notional expense – Has to be added-back to income Real Income Theory – Real profits and statutory profits – Income Tax is a tax on "real income". (Para 39)
       57 ITR 521 – Relied upon
       103 ITR 384 at page 391 – Cited with approval
       (j) RBI Act – Section 45Q – Directions 1998 have overriding effect over Companies Act, 1956 – Accounting Policy of NBFC cannot determine the taxable income – Instant dispute – Section 145 not applicable. (Para 41)
       (k) Income Tax Act, 1961 – Section 36(1) (viia) – Provision for NPA – Scheduled Bank – Allowed as deduction – Only after adding it back to income. (Para 44)
       (l) Income Tax Act, 1961 – Section 37 – Deduction s cannot be claimed for items expressly excluded from sections 30 to 36 – Provision for doubtful debt expressly excluded from Section 36(1)(vii) –Deductions cannot be claimed for provision u/s 37 even on the basis of "real income theory". (Para 45)
       (m) Sections 36(1)(viia) and 43D – Risk is one of the main concerns in case of NBFCs while it is liquidity in case of Banks – Norms for NPAs therefore have to be different for Banks and NBFCs – Incentive u/s 36(1)(viia) given to Banks but not to NBFCs – Neither Section 36(1) (viia) nor Section 43D violates Article 14 or 19. (Para 52, 53)
       (1981) 4 SCC 675; (2000) 5 SCC 471; 1952 SCR 597; 2005 (1) All ER 97 – Relied upon
       Facts of the case:
       The question arising in these appeals is “Whether the Income Tax 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, while computing the profits and gains of the business under Sections 28 to 43D of the IT Act?”
       Finding of the Court:
       Section 43D is similar to Section 43B.
       Sections 36(1)(viia) and 43D are not unconstitutional.
       There is no infirmity in the impugned judgment.
       Result:
       Appeals dismissed.

Judgment :-

S.H. KAPADIA, J.

Leave granted in the Special Leave Petition.

Introduction

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

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].

At the outset, it may be stated that categorization of assets into doubtful, sub-standard and loss is not in dispute.

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.

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/-.

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, 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

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.

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 Norms 1998. As per the said method of

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2010 Supreme(SC) 36

Cases Referred (2)