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2011 (2) TMI 40 - AT - Income TaxProvision for doubtful debt - The provisions of section 43D lay down the limits upto which interest income of bad and doubtful debts in the case of public companies need not be recognised as income, in a case where Assessee follows mercantile system of accounting - claim of the Assessee in contrary to the provisions of section 43D and cannot therefore the claim of the Assessee based on real income theory and there being no real accrual of income cannot be accepted Assessee s appeal dismissed the decision of the Hon ble Delhi High Court in Vasisth Chay Vyapar Ltd. (2010 -TMI - 202354 - Delhi High Court ) and the Madras High Court in Elgi Finance Ltd. (2007 -TMI - 13558 - MADRAS High Court ) will not be applicable to the facts of the present case. Rather the decision of the Hon ble Supreme Court in the case of Southern Technologies (2010 -TMI - 35183 - SUPREME COURT OF INDIA) alone will apply.
Issues Involved:
1. Addition of interest accrued on non-performing assets (NPAs) under Section 43D of the Income-tax Act. 2. Interpretation of the expression "having regard to" in Section 43D. 3. Applicability of NHB guidelines versus Rule 6EB of the Income-tax Rules. 4. Application of the real income theory. 5. Relevance of judicial precedents and circulars in interpreting Section 43D. Detailed Analysis: 1. Addition of Interest Accrued on NPAs under Section 43D: The primary issue was whether the interest accrued on NPAs amounting to Rs. 23,77,390/- should be added to the assessee's income. The assessee, a housing finance company, argued that it followed NHB guidelines which prescribed a 90-day norm for recognizing a debt as an NPA, contrasting with the 180-day norm in Rule 6EB of the Income-tax Rules. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] added the interest income based on Rule 6EB, leading to the appeal. 2. Interpretation of "Having Regard to" in Section 43D: The assessee contended that the phrase "having regard to" in Section 43D implies that NHB guidelines should be considered, and therefore, the 90-day norm should apply. The assessee cited judicial pronouncements such as Delhi Farming and Construction (P) Ltd. v. CIT and Rajesh Kumar & Others v. DCIT to support this interpretation. However, the Tribunal held that Section 43D does not mandate automatic incorporation of NHB guidelines into Rule 6EB and that the rule-making authority has discretion in this regard. 3. Applicability of NHB Guidelines versus Rule 6EB: The Tribunal analyzed whether the NHB guidelines should be read into Rule 6EB. It concluded that NHB is not the rule-making authority under the Income-tax Act, and the rule-making authority is not bound to revise the rules in line with NHB guidelines. The Tribunal emphasized that the purpose of NHB guidelines and the purpose of not recognizing interest income under the Act are different, and hence, the rule-making authority has the discretion to follow or not follow NHB guidelines. 4. Application of the Real Income Theory: The assessee argued that even if interest income accrued, it should not be taxed due to the real income theory, citing the Supreme Court's decision in UCO Bank and the Delhi High Court's decision in CIT v. Vasisth Chay Vyapar Ltd. The Tribunal, however, held that the real income theory cannot override the explicit provisions of the Act. It noted that Section 43D lays down specific limits for recognizing interest income on bad and doubtful debts, and any claim beyond these limits cannot be accepted. 5. Relevance of Judicial Precedents and Circulars: The Tribunal reviewed various judicial precedents and circulars cited by both parties. It distinguished the cases relied upon by the assessee, noting that they dealt with different contexts or were not directly applicable to the interpretation of Section 43D. The Tribunal also referred to the Supreme Court's decision in Southern Technologies Ltd. v. Jt. CIT, which clarified that prudential norms of regulatory bodies like RBI or NHB do not override the provisions of the Income-tax Act. Conclusion: The Tribunal upheld the CIT(A)'s order, confirming the addition of Rs. 23,77,390/- as interest income accrued on NPAs. It dismissed the appeal by the assessee, holding that the provisions of Section 43D and Rule 6EB must be followed, and the real income theory does not apply to override these provisions. The decision emphasized the discretionary power of the rule-making authority and the distinct purposes of NHB guidelines and the Income-tax Act.
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