2011 (7) TMI 87 - HC - Income Tax

Disallowance - special reserve account and bad and doubtful debts account which is It reflected in the annual accounts for the Financial Year 1995-96 - if the deduction for bad debts was not to be reduced to the extent of the aforesaid amounts the assessee would have enjoyed double deduction which according to the CIT(A) is contrary to the provisions of law - The unamended provision allowed the deduction to a financial institution for an amount not exceeding 40% of the total income carried to a special reserve - The assessee in this case being a financial institution is governed by these guidelines issued by the RBI and has therefore correctly reversed the interest from NPA and it is not the case of revenue that the assessee has realized any part of the interest which it has credited to the P & L A/c in the earlier years to the extent the interest remains unrealized the same is really in the nature of bad debt and could have been claimed u/s 36(1)(vii) - If the income which is earlier recognized is not to be allowed to be reversed in the subsequent assessment years in any case it is permissible for the assessee to write off such an income in the concerned assessment years when it was found that the amount was not recoverable - Appeal is dismissed

Issues Involved:
1. Deduction under Section 36(1)(viii)/Section 41(4A) of the Income Tax Act.
2. Deduction for bad debts written off.
3. Expenditure incurred in connection with swapping of foreign currency fund.
4. Expenditure incurred on the issue of bonds under Section 35D.
5. Deletion of addition made by the Assessing Officer on account of reversal of interest income.

Detailed Analysis:

1. Deduction under Section 36(1)(viii)/Section 41(4A):
The main issue in the appeals pertains to the deduction under Section 36(1)(viii) of the Income Tax Act. The assessee, Industrial Finance Corporation Limited, claimed a deduction for the special reserve created under this section. The AO disallowed Rs. 50 Crores transferred from the special reserve to the bad and doubtful debts account, arguing it would result in double deduction. The CIT(A) upheld this disallowance. However, the Tribunal allowed the deduction, noting that the reserve was created by debiting the profit and loss account, fulfilling the requirement of Section 36(1)(viii). The Tribunal's decision was based on the unamended provision applicable before the amendment effective from 01.04.1998, which required only the creation of the reserve, not its maintenance. The High Court concurred with the Tribunal, referencing the Kerala High Court's rulings and CBDT Circular No. 763, which clarified that the amendment was prospective.

2. Deduction for Bad Debts Written Off:
The AO disallowed the deduction for bad debts written off, arguing that the assessee could not claim both the provision for bad and doubtful debts under Section 36(1)(viia)(c) and the actual bad debts written off. The CIT(A) partially upheld this, reducing the deduction by the amounts transferred from the special reserve and the provision for bad and doubtful debts. The Tribunal reversed the CIT(A) on the issue of reducing the deduction by the amount transferred from the special reserve but upheld the adjustment for the provision for bad and doubtful debts. The High Court agreed with the Tribunal, noting that the amendment to Section 36(1)(viii) was prospective and did not apply to the assessment years in question.

3. Expenditure Incurred in Connection with Swapping of Foreign Currency Fund:
The High Court dismissed the Revenue's appeal on this issue, noting that it was covered by a previous judgment in favor of the assessee for the Assessment Year 1995-96.

4. Expenditure Incurred on the Issue of Bonds under Section 35D:
In other appeals, the issue of whether expenditure on the issue of bonds is covered by Section 35D was raised. The High Court noted that this issue had already been decided in favor of the assessee in earlier assessment years, and thus, no question of law arose.

5. Deletion of Addition Made by the Assessing Officer on Account of Reversal of Interest Income:
For the Assessment Year 2000-01, the AO added Rs. 144 Crores to the assessee's income, arguing that the reversal of interest income from Non-Performing Assets (NPAs) was not permitted under Section 43D. The CIT(A) upheld this addition, but the Tribunal reversed it, stating that the assessee, as a financial institution, was required to follow RBI guidelines, which mandated the reversal of interest income on NPAs. The High Court agreed with the Tribunal, noting that the assessee could write off such income in the concerned assessment years when it was found to be non-recoverable, referencing Supreme Court judgments in Vijaya Bank and T.R.F. Ltd.

Conclusion:
The High Court dismissed the appeals filed by the Revenue, upholding the Tribunal's decisions on all issues. The Court affirmed that the amendments to Section 36(1)(viii) and Section 41(4A) were prospective and not applicable to the assessment years in question. The Court also upheld the Tribunal's decision on the reversal of interest income, aligning with RBI guidelines and Supreme Court precedents.

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