2023 (2) TMI 810 - HC - Income Tax

Interest pertaining to non-performing assets - Reversal of income - Allowable deduction from the taxable income relating to an accounting year - permissible deduction from net profit on account of a provision made in respect of interest pertaining to non-performing assets u/s 28 - Whether Tribunal justified in holding that interest pertaining to non-performing assets cannot be deducted from the taxable income relating to an accounting year, even though the relevant assets have become non-performing assets only in that accounting year ? - reversal of credit entries relating to a past accounting year can be made in the current accounting year for the purposes of computing the taxable income of the current accounting year - HELD THAT - Tribunal had considered the circular of RBI dated 04.07.2002 and held that once an income of a previous year is recorded, assessee cannot reduce the income of subsequent years on the ground that in the earlier year income was shown on actual basis wrongly. Tribunal held that such a claim of the assessee is not permissible under the provisions of the Act. Further, Tribunal held that assessee had also not written off the NPAs as bad debts under Section 36(1)(vii) of the Act. Therefore, there was no question of writing off such interest as a bad debt. In the hearing today, appellant has referred to Section 21 of the Banking Regulation Act, 1949 and submits that under sub-section (1) thereof, all banking companies are bound to follow policy of the RBI so determined. Therefore, assessee being a banking company had to comply with the RBI guidelines. Also in case M/s. Motor Industries Company 1983 (2) TMI 251 - SUPREME COURT and submits that in that case under the Kerala General Sales Tax Act, 1963, Supreme Court had pointed out a way to overcome such a difficulty. Further reference has been placed on the decision of the Supreme Court in UCO Bank 1999 (5) TMI 3 - SUPREME COURT to contend that it is always open to the Central Board of Direct Taxes (CBDT) to issue instructions under Section 119 of the Act to remove any difficulty in which event such instructions would be binding on the department. We are afraid we cannot accept such contention urged by appellant. In the present appeal, it is not CBDT which has issued circulars or guidelines under Section 119 of the Act. On the other hand, circular has been issued by the RBI which is binding on all the banking companies in general. However, when it comes to assessment under the Act, the revenue authorities are bound by the provisions of the Act. Therefore, the claim of the assessee that interest paid on NPAs should be excluded from computation of income was rightly negatived by the assessing officer, which has been affirmed by the two lower appellate authorities. As pointed out by the Supreme Court in M/s. Motor Industries Company (supra), it is always open for the assessee or appellant to file a revised return and claim the deduction. Even if assessment is completed, assessee could have demanded adjustment or refund by preferring the claim in time. But that was not done. No substantial question of law.

Summary

Issues:
1. Deductibility of interest pertaining to non-performing assets.
2. Reversal of credit entries for past accounting years.
3. Deduction from net profit for interest on non-performing assets.
4. Treatment of debit to interest account and credit to suspense account as "writing off a bad debt."

Issue 1: Deductibility of interest pertaining to non-performing assets:
The appellant, a bank, appealed against the assessing officer's decision to disallow the deduction of interest on non-performing assets (NPAs) for the assessment year 1999-2000. The appellant argued that as per RBI guidelines, interest on NPAs should be reversed or provided for in the corresponding previous year. However, the assessing officer added the interest to the appellant's income. The Commissioner of Income Tax (Appeals) upheld the assessing officer's decision, citing Section 43D of the Income Tax Act, which requires interest income on certain bad debts to be chargeable in the year it is credited to the bank's profit and loss account. The Tribunal referred to RBI guidelines and previous court decisions, concluding that once income of a previous year is recorded, the appellant cannot reduce subsequent years' income based on earlier accruals. The Tribunal also noted that the appellant did not write off the NPAs as bad debts under Section 36(1)(vii) of the Act, thus rejecting the appellant's claim for deduction.

Issue 2: Reversal of credit entries for past accounting years:
The Tribunal emphasized that under RBI guidelines, interest accrued on NPAs should be reversed or provided for in the corresponding previous year. The Tribunal clarified that the mode of claiming deduction under the Income Tax Act was not mentioned in the RBI instructions. The Tribunal illustrated scenarios where income recognition principles apply, emphasizing that once income of a year is properly recorded, the appellant cannot reduce subsequent years' income based on earlier accruals. The Tribunal referred to the State Bank of Travancore case and the Poysha Oxygen case to support its decision that the appellant's claim for deduction was contrary to law.

Issue 3: Deduction from net profit for interest on non-performing assets:
The Tribunal rejected the appellant's claim for deduction on the grounds that the interest on NPAs was not written off as bad debts under Section 36(1)(vii) of the Act. The Tribunal held that the appellant could not reduce subsequent years' income based on earlier accruals and that the claim was not permissible under the provisions of the Act.

Issue 4: Treatment of debit to interest account and credit to suspense account as "writing off a bad debt":
The Tribunal noted that the appellant had not written off the impugned sum as a bad debt under Section 36(1)(vii) of the Act. The Tribunal held that the claim of the appellant was contrary to law and rejected the contention that there was no question of writing off such interest as a bad debt.

In conclusion, the High Court dismissed the appeal, stating that no substantial question of law arose from the Tribunal's order. The Court emphasized that the RBI guidelines, while binding on banking companies, did not override the provisions of the Income Tax Act. The Court highlighted that the appellant had the option to file a revised return or claim a deduction but had not done so, leading to the dismissal of the appeal.