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2006 (3) TMI 275 - AT - Income TaxAccrual Of income - interest income on non-performing asset (NPA) - mercantile system of accounting - non-banking finance company - whether RBI guidelines would override income-tax provisions or not - Deduction u/s 36(1)(vii) - written off as bad debts - depreciation deemed to have been allowed in the years in which income was computed u/s 115J - Expenditure for purchase of software - MAT - Claims for provision of NPAs. HELD THAT - As per RBI Act, the income on NPAs is not to be credited to P L a/c. In case of an asset if interest is not received for six months it is to be treated as NPA. The assessee had not credited income to P L a/c following RBI guidelines. As we have already held that RBI guidelines are for the purpose of supervision, management and control of monetary and credit system it would not stop accrual of income u/s 5 of the IT Act. If RBI guidelines were to stop the accrual of income u/s 5 of the Act, it would have mentioned so. Thus, RBI guidelines dt. 13th June, 1994 or issued subsequently u/s 45JA cannot override IT Act which is a Special Act and RBI is General Act in relation to IT Act. The income of such assessees was determined as per Circular dt. 9th Oct., 1984. Because of this reason s. 43D was inserted in the statute. RBI guidelines in case of NBFC are for the purpose of control and supervision with respect to public interest and viability of the NBFC. The guidelines never intended for taking the interest income accrued as per s. 5 of the Act out of the scope of IT Act. If the contention of assessee is accepted, it would amount to insertion of 'NBFC' in s. 43D of the Act, that too by a guideline issued for different purposes by an authority other than Parliament. In other words the doctrine of casus omissus will deem to have been applied which is contrary to law of land as propounded by the Hon'ble Supreme Court in the cases relied upon by the learned Departmental Representative. Thus, it is clear that RBI guidelines alone are not sufficient for recognition of income on cash basis for the purpose of income-tax. There has to be a provision similar to s. 43D in case of NBFCs also. Thus, it is clear that the IT Act, 1961 is a Special Act. RBI guidelines have been issued under delegated legislation for the purpose of effective supervision and control of monetary and credit system. The RBI guidelines have not been issued to override the mandatory provisions of s. 145 of the Act. This view is supported by the decision of Hon'ble Madras High Court in the case of CIT vs. T.N. Power Finance Infrastructure Development Corporation Ltd. 2005 (10) TMI 38 - MADRAS HIGH COURT , wherein it has been held that RBI guidelines cannot override the mandatory provisions of s. 36(1)(viia) of the Act. In view of above discussions and the decision of Hon'ble Madras High Court, it is held that RBI guidelines will not override the mandatory provisions of s. 145 of the Act. Since the assessee is following mercantile system of accounting, the interest income on NPAs will be assessed to tax on accrual basis. The alternative argument of ld AR of the assessee is that if the contention of the assessee for recognition of income on receipt basis is not accepted, the amount of interest should be treated to have been written off. We are unable to accept this plea on the ground that for claiming deduction u/s 36(1)(vii) the assessee has to actually write off a bad debt in the books of account, in view of decision of Hon'ble Madras High Court in the case of CIT vs. Micromax Systems (P) Ltd. 2005 (7) TMI 70 - MADRAS HIGH COURT . Depreciation deemed to have been allowed in the years in which income was computed u/s 115J of the Act - We find that this issue is covered by the decision of Hon'ble Supreme Court in the case of Karnataka Small Scale Industries Development Corporation Ltd. vs. CIT 2002 (12) TMI 4 - SUPREME COURT , wherein it has been held that even where the book profit liability is imposed, the amounts of business loss, unabsorbed depreciation, investment allowance etc., at the beginning of the accounting year are to be adjusted and set-off to the same extent of such brought forward losses, unabsorbed depreciation, etc., as they would have been adjusted or set-off had the assessee been assessed to tax in the regular way in accordance with provisions of ss. 28 to 43 of the Act, and only the resultant amount of loss, unabsorbed depreciation, etc., can be carried forward to the next year. The Supreme Court further observed that all that s. 115J(2) does is to preserve the right to carry forward the balance of the unabsorbed loss and unabsorbed depreciation in the relevant previous year to next year. Respectfully following the decision of Hon'ble Supreme Court, the issue is decided against the assessee and in favour of Revenue. Accordingly the order passed by learned CIT(A) is upheld on this issue. Expenditure for purchase of software - In this case the assessee has leased out computer along with software. The life of software is not short as held in the case of Arawali Constructions Co. (P) Ltd., Maruti Udyog Ltd. and Company Law Institute. Therefore, the software purchased will be capital in nature. Accordingly, we do not find any infirmity in the order passed by authorities below. MAT - We find that this issue is covered by the decision of Special Bench of Tribunal, Hyderabad Bench, in the case of Dy. CIT vs. Nagarjuna Investment Trust Ltd. 1997 (4) TMI 115 - ITAT HYDERABAD wherein it has been held that SOD is appropriate method to determine income of hire purchase transactions. Respectfully following the order of Tribunal. Hyderabad Bench it is held that the issue is covered against the assessee and in favour of the Revenue. Accordingly, we do not find any infirmity in the orders passed by authorities below. Claims for provision of NPAs - We find that in the case of T.N. Power Finance Infrastructure Development Corporation Ltd. vs. Jt. CIT 2005 (10) TMI 38 - MADRAS HIGH COURT has held that merely because the RBI had directed the assessee to provide for non-performing assets, that direction could not override the mandatory provisions of the IT Act contained in s. 36(1)(viia), which stipulate a deduction not exceeding 5 per cent of total income only in respect of the provision for bad and doubtful debts, which are predominantly revenue in nature or trade related and not for provision for non-performing assets, which are of predominantly capital nature. Respectfully following the decision of jurisdictional High Court, it is held that provision made for bad and doubtful debts following the guidelines issued by RBI in respect of NPAs will not be allowable as deduction. In the result assessee's appeal is dismissed.
Issues Involved:
1. Recognition of income from non-performing assets (NPAs). 2. Depreciation deemed to have been allowed under section 115J. 3. Expenditure for purchase of software. 4. Change in the method of accounting for hire purchase transactions. 5. Provision for NPAs. 6. Sales-tax collected but not paid. 7. Higher rate of depreciation on leased vehicles. Issue-wise Detailed Analysis: 1. Recognition of Income from Non-Performing Assets (NPAs): The assessee, a non-banking financial company (NBFC), followed RBI guidelines and did not recognize income from NPAs on an accrual basis. The Assessing Officer (AO) added Rs. 1,30,78,653/- as interest income on NPAs not credited to the Profit & Loss (P&L) account, which was confirmed by the CIT(A). The assessee argued that RBI guidelines are binding and income from NPAs should be recognized only when actually received. The assessee cited various judicial precedents, including the Supreme Court's decision in Godhra Electricity Co. Ltd. vs. CIT and the Tribunal's decisions in T.C.I. Finance Ltd. vs. Asstt. CIT and Tedco Investment & Financial Services (P) Ltd. vs. Dy. CIT, to support its stance. The Revenue countered that RBI guidelines cannot override the mandatory provisions of section 145 of the Income Tax Act. The Tribunal concluded that RBI guidelines are for supervisory purposes and do not affect the accrual of income under section 5 of the IT Act. Therefore, the interest income on NPAs must be recognized on an accrual basis as per the IT Act. 2. Depreciation Deemed to Have Been Allowed Under Section 115J: The assessee contended that the Written Down Value (WDV) of assets should not be reduced by depreciation not actually allowed under section 115J. The Tribunal referred to the Supreme Court's decision in Karnataka Small Scale Industries Development Corporation Ltd. vs. CIT, which held that even under the book profit regime, depreciation must be adjusted as per the regular provisions of the IT Act. Thus, the Tribunal upheld the CIT(A)'s order, denying the assessee's claim for depreciation of Rs. 13,25,18,600/-. 3. Expenditure for Purchase of Software: The AO disallowed the expenditure on software as revenue expenditure, treating it as capital in nature, which was affirmed by the CIT(A). The assessee argued that software does not last long and should be treated as revenue expenditure. The Tribunal, relying on judicial precedents, including the Rajasthan High Court's decision in CIT vs. Arawali Constructions Co. (P) Ltd. and Maruti Udyog Ltd. vs. Dy. CIT, concluded that software has an enduring benefit and should be treated as a capital expenditure. The Tribunal upheld the CIT(A)'s order, allowing depreciation on software as part of computer and accessories. 4. Change in the Method of Accounting for Hire Purchase Transactions: The assessee changed its accounting method for hire purchase transactions from the Sum of Digits (SOD) method to the Internal Rate of Return (IRR) method. The Tribunal referred to the Special Bench decision in Dy. CIT vs. Nagarjuna Investment Trust Ltd., which held that the SOD method is appropriate for determining income from hire purchase transactions. Therefore, the Tribunal upheld the CIT(A)'s order, rejecting the change in the accounting method. 5. Provision for NPAs: The assessee made provisions for bad and doubtful debts following RBI guidelines. The Tribunal, relying on the Madras High Court's decision in CIT vs. Micromax Systems (P) Ltd. and T.N. Power Finance & Infrastructure Development Corporation Ltd. vs. Jt. CIT, held that provisions for NPAs are not allowable as deductions under section 36(1)(vii) unless actually written off in the books of account. The Tribunal upheld the CIT(A)'s order, disallowing the provision for NPAs. 6. Sales-Tax Collected but Not Paid: The AO taxed the sales-tax collected but not paid by the assessee, following the Supreme Court's decision in Chowringee Sales Bureau (P) Ltd. vs. CIT. The CIT(A) allowed the assessee's claim, following the decision in Sundaram Finance Ltd. The Tribunal, relying on the Madras High Court's decision in CIT vs. Southern Explosives Company and the Supreme Court's decision in K.C.P. Ltd. vs. CIT, held that sales-tax collected but not paid is taxable as trading receipt. The Tribunal set aside the CIT(A)'s order and restored the AO's order on this issue. 7. Higher Rate of Depreciation on Leased Vehicles: The AO denied the higher rate of depreciation on leased vehicles, which was allowed by the CIT(A). The Tribunal, following the Madras High Court's decision in CIT vs. Madan & Co., held that the assessee is entitled to a higher rate of depreciation on leased vehicles. The Tribunal upheld the CIT(A)'s order on this issue. Conclusion: The Tribunal dismissed the assessee's appeal and partly allowed the Revenue's appeal, upholding the CIT(A)'s orders on most issues except for the sales-tax collected but not paid, which was restored to the AO's order.
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