2011 (9) TMI 1083 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 19,95,596/- made by the Assessing Officer.
2. Applicability of RBI prudential norms for NBFCs in recognizing income.
3. Deductibility of provision for doubtful debts u/s 36(1)(vii) or 37(1) of the Act.

Summary:

Issue 1: Deletion of Addition of Rs. 19,95,596/-

The Revenue appealed against the order of the Commissioner of Income-tax (Appeals) which deleted the addition of Rs. 19,95,596/- made by the Assessing Officer. The Assessing Officer had added back the provision for doubtful debts while computing the total income as per regular provisions of the Income Tax Act, 1961, as well as income as per provisions of section 115JB.

Issue 2: Applicability of RBI Prudential Norms for NBFCs in Recognizing Income

The assessee, an NBFC, argued that the provision for doubtful debts was not routed through the Profit & Loss account and represented unearned finance charges/lease rentals for non-performing assets as per RBI prudential norms. The Commissioner of Income-tax (Appeals) upheld that income in respect of non-performing assets did not accrue following the prudential norms prescribed by the RBI, even while keeping accounts as per the mercantile system of accounting. The Commissioner deleted the addition, stating that the assessee was justified in not offering the interest of Rs. 19,99,596/- as its income for the assessment year.

Issue 3: Deductibility of Provision for Doubtful Debts u/s 36(1)(vii) or 37(1)

The Revenue relied on the Supreme Court decision in Southern Technologies Ltd v. JCIT, which held that RBI directions for provisioning non-performing assets do not affect the computation of taxable income. The assessee countered with the Delhi High Court decision in CIT v Vasisth Chay Vyapar Ltd., which held that interest income on non-performing assets, as per RBI norms, does not accrue for tax purposes. The Tribunal noted that the Assessing Officer's order was silent on whether the provision was claimed under section 36(1)(vii) or 37(1). The Tribunal remitted the issue back to the Assessing Officer to verify if the amount represented unrecognized income on a non-performing asset per RBI norms and not a provision debited in the Profit & Loss account. If the former, no addition would be warranted as per the Delhi High Court decision.

Conclusion:

The Tribunal allowed the Revenue's appeal in part, remitting the issue to the Assessing Officer for verification and appropriate decision-making, ensuring the assessee is given a reasonable opportunity of being heard.

Decision pronounced in the open Court on this 30th Day of September, 2011.