2023 (1) TMI 488 - HC - Income Tax

Diminution in the value of investment in two unlisted companies - provision made in respect of Non-Performing Assets which are considered irrecoverable - HELD THAT - The investments of the appellant assessee in two unlisted companies are not Stock-in-Trade . They are merely investments. Deductions are to be strictly in compliance with the provisions of the Income Tax Act, 1961. Loss in the value of investment will arise only when such shares are sold by the appellant. The appellant is therefore not entitled for deduction on account of alleged diminution in the value of investment due to the purported loss suffered by the said company on such investment of the appellant. Therefore, the Question of Law No.1 is answered against the appellant assessee. Provision made in respect of Non Performing Assets - Claim if not allowable as a bad debt is allowable as a business loss - HELD THAT - The appellant is a non-banking financial company within the meaning of Section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934) as made applicable to Section 36(1) of the Income Tax Act, 1961. The expression non-banking financial company has the same meaning assigned to it in clause ( f ) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934). Provision for bad and doubtful debts made by a non-banking financial company cannot exceed five per cent of the total income computed before making any deduction under Section 36 Chapter VI-A of the Act. Therefore, the Appellant cannot claim deduction beyond the amount that is statutorily recognized. This view was affirmed by this Court in T.N.Power Finance Infrastructure Development Corporation Limited 2005 (10) TMI 38 - MADRAS HIGH COURT Therefore, the Substantial Question of Law is answered against the appellant. Diminution in value of repossessed stock of vehicles - HELD THAT - The loss from the repossessed vehicles can be ascertained only after they are resold. Till such time, loss cannot be determined. Estimated loss based on the difference between the receivable and the projected market value would not entitle the appellant to reduce the value of the asset to reduce the market value unless provided in the relevant Accounting Standard. We have also not been informed about any Accounting Standard as per which the diminution in the value is allowed. There are also no materials before us to interfere with the finding of the Tribunal in the impugned order. Further, the balance amount, if any, will be recovered from the defaulter. Merely because there is erosion in the value based on the estimates would not ipso facto entitle diminution to claim deduction.Substantial Question of Law No.3 is also answered against the appellant.

Summary

Issues Involved:
1. Deduction of provision for Non-Performing Assets (NPA).
2. Deduction for diminution in the value of investments.
3. Deduction for diminution in the value of repossessed vehicles.

Issue-wise Detailed Analysis:

1. Deduction of Provision for Non-Performing Assets (NPA):

The appellant claimed a deduction of Rs.1,44,12,000/- for provisioning of NPAs based on RBI guidelines and a prior decision of the Income Tax Appellate Tribunal (ITAT), Chennai. However, conflicting views from other ITAT benches (e.g., ITAT Bombay in Rajasthan Bank case) and the Commissioner of Income Tax (Appeals) (CIT(A)) in M/s. First Leasing Company Ltd. case were noted. The Tribunal upheld the CIT(A)'s order, referencing the appellant's own case from prior years (I.T.A.No.181/Mds/2002 and I.T.A.No.131/05-06). Section 36(1)(viia) of the Income Tax Act, 1961, allows specific deductions for bad and doubtful debts, but the appellant, as a Non-Banking Financial Company (NBFC), could not claim beyond the statutory limit of 5% of total income. This view was supported by the High Court in T.N. Power Finance & Infrastructure Development Corporation Limited vs. Joint Commissioner of Income Tax. Thus, the substantial question of law was answered against the appellant.

2. Deduction for Diminution in the Value of Investments:

The appellant claimed Rs.53,98,000/- as a deduction for the diminution in the value of investments in two unlisted companies. The Tribunal dismissed this claim, relying on prior decisions in the appellant's own cases (I.T.A.No.181/Mds/2002 and I.T.A.No.131/05-06). The Supreme Court in Madhya Pradesh Co-Operative Bank Ltd. vs. Additional Commissioner of Income Tax held that government securities cannot be considered circulating capital or stock-in-trade. Similarly, investments in unlisted company shares are not circulating capital or stock-in-trade. Deductions must comply strictly with the Income Tax Act, 1961. Losses from investments arise only upon sale, not merely from diminished value. Thus, the question of law was answered against the appellant.

3. Deduction for Diminution in the Value of Repossessed Vehicles:

The appellant sought a deduction for Rs.4,18,63,000/- based on the diminution in the value of repossessed vehicles. The Tribunal found that the appellant reduced the value of receivables based on estimated market value at repossession, not actual sales. Section 36(1)(vii) of the Income Tax Act allows deductions for bad debts written off as irrecoverable, but the appellant did not write off these receivables as bad debts. The Tribunal noted that the RBI guidelines and Accounting Standards (AS 19) were not clearly followed or explained by the appellant. The Supreme Court in Vijaya Bank vs. Commissioner of Income Tax clarified that mere provisions for doubtful debts are insufficient for deductions without actual write-offs. The Tribunal concluded that estimated losses based on market value projections do not qualify for deductions unless provided by relevant accounting standards. Thus, the substantial question of law was answered against the appellant.

Conclusion:

The High Court dismissed the appeal, affirming the Tribunal's decisions on all substantial questions of law against the appellant. The deductions claimed for NPAs, diminution in investment value, and diminution in repossessed vehicle value were not allowable under the Income Tax Act, 1961. The assessment order was deemed erroneous and prejudicial to the revenue's interest.