REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE/ORIGINAL JURISDICTION

CIVIL APPEAL NO. 1337/2003

M/s Southern Technologies Ltd.

… Appellant(s)

versus

Joint Commnr. of Income Tax, Coimbatore

… Respondent(s)

with

C.A.No. 154 /2010 @ SLP(C) No. 22176/2009

TRANSFERRED CASE NO. 5/2005 & 6/2005

J U D G M E N T

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 30^th 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 31^st 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/-

2

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

3

Appellant made “Provision for NPA” amounting to Rs. 81,68,516/-

for the financial year ending 31^st 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 provis