2017 (10) TMI 778 - HC - Income Tax

Disallowance of claim for deduction in respect of non-performing assets from its income for the assessment year 2005-06 - main reason for disallowance made by AO was that the assessee s application for registration as an NBFC was rejected by the RBI - Held that - This question stands answered against the assessee by the Hon ble Supreme Court in the case of Southern Technologies Limited Vs. Joint Commissioner of Income Tax reported in (2010 (1) TMI 5 - SUPREME COURT OF INDIA) as held the RBI Directions, 1998, though deviate from accounting practice as provided in the Companies Act, do not override the provisions of the Income-tax Act. Some companies, for example, treat write offs or expenses or liabilities as contingent liabilities. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the Income-tax Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions 1998 and the Income-tax Act operate in different fields. - Decided in favour of the Revenue

Summary

Issues:
Disallowance of deduction for non-performing assets claimed by the assessee for the assessment year 2005-06 based on rejection of NBFC registration by RBI.

Analysis:
The High Court of Calcutta addressed the issue of disallowance of a deduction claimed by the assessee for non-performing assets (NPAs) in the assessment year 2005-06 due to the rejection of registration as a Non-Banking Financial Company (NBFC) by the Reserve Bank of India (RBI). The assessing officer disallowed the deduction, but both the Commissioner and the Appellate Tribunal upheld the assessee's claim. The main question of law before the Court was whether the provision for NPAs made by the assessee was allowable as a deduction from its income, considering the RBI guidelines and the provisions of the Income Tax Act, 1961. The Court referred to a Supreme Court judgment in the case of Southern Technologies Limited Vs. Joint Commissioner of Income Tax, where it was held that RBI Directions, 1998, do not override the provisions of the Income-tax Act. The Court emphasized that the nature of the transaction must be examined to determine the allowability of the expense or loss, irrespective of how it is presented in the financial statements.

The Court also mentioned a previous case where a similar question of law was addressed, and the Court ruled in favor of the Revenue. The Court found no distinguishing feature in the present appeal and answered the question against the assessee, allowing the appeal in favor of the Revenue. The Court concluded the judgment by stating that there would be no order as to costs in this matter.

In summary, the High Court of Calcutta ruled on the disallowance of a deduction claimed by the assessee for NPAs based on the rejection of NBFC registration by the RBI. The Court emphasized the need to examine the nature of the transaction to determine the allowability of the expense or loss, regardless of how it is presented in the financial statements. The Court found no distinguishing feature in the present case and ruled in favor of the Revenue, allowing the appeal and not awarding any costs.