2009 (2) TMI 283 - HC - Income Tax

Question relating to bills discounting facility submission that income accrues to the assessee only when the assessee receives the bill value at the end of the period of bill or earlier and that accounting system 9.4 is mandatory and there would not be certainty only at the date of discount, is acceptable - question regarding bad debt - Tribunal was right in holding that the transaction of discount is complete at the moment, the customer is given 90 per cent. of the value of the bill. The discount is equivalent to the interest and it accrued at that point. Tribunal was right in concluding that the uncertainty regarding the discharge of the bill or rediscounting has no relevance - In the present case, the debts are shown as written off on the basis of the formula given by the Reserve Bank of India. Writing off of the debt as bad requires judgment on The part of the person carrying on the business but, in the present case, the debts evidently have been written off merely on the basis of the Reserve Bank of India norms and nothing more. So they were not deductible u/s 36 In respect of lease equalization charge, when these charges were debited according to the RBI guidelines and when the department also admitted it, the amount could not be added back to profits of company under section 115JA

Issues Involved:
1. Method of accounting income from bill discounting.
2. Claim for 100% depreciation on leased assets.
3. Allowability of provisions for non-performing assets (NPAs) under the Income-tax Act.
4. Recognition of lease equalization charges in computing book profit under section 115JA of the Income-tax Act.
5. Write-off of bad debts as business loss under section 28 or as bad debt under section 36(1)(vii) of the Income-tax Act.

Detailed Analysis:

1. Method of Accounting Income from Bill Discounting:
The primary issue was whether the income from bill discounting should be recognized at the time of discounting or over the period of discount. The assessee, a non-banking finance company, argued that the income should be recognized over the period due to the uncertainty involved. The Tribunal, however, held that the income accrues at the time of discounting, citing the certainty of the transaction at that point. The Tribunal's decision was upheld, concluding that the transaction of discount is complete at the moment the customer is given 90% of the bill value, and the discount is equivalent to interest, which accrues on the date of discount.

2. Claim for 100% Depreciation on Leased Assets:
In T.C. (A) No. 107 of 2002, the issue regarding the claim for 100% depreciation on assets leased to M/s. Lord Furnace was restored to the file of the Assessing Officer, making the question academic. Similarly, in T.C. (A) No. 109 of 2002, the question regarding depreciation on assets leased to M/s. Vatan Dye Chem Export Limited was also considered academic and not argued.

3. Allowability of Provisions for NPAs:
The assessee claimed deductions for provisions made towards NPAs as per RBI guidelines. The Tribunal held that such provisions are not allowable as deductions under the Income-tax Act, emphasizing that the provisions of the Act override RBI norms. It was concluded that the provisions for bad and doubtful debts cannot be treated as a write-off of bad debts, and the assessee's claim was rejected.

4. Recognition of Lease Equalization Charges:
The issue was whether lease equalization charges should be included in computing "book profit" under section 115JA. The assessee argued that these charges should be excluded as they represent a recovery of the net investment made by the lessor. The Tribunal, however, upheld the Revenue's view that lease equalization charges are contingent in nature and should be included in computing book profit. The Supreme Court's decision in HCL Comnet Systems was cited, which held that a provision for diminution in the value of an asset cannot be added back under section 115JA. Thus, the fourth question in T.C. (A.) Nos. 108 and 110 of 2002 was answered in favor of the assessee.

5. Write-off of Bad Debts:
The assessee's claim for deduction of bad debts was based on provisions made as per RBI norms. The Tribunal held that such provisions do not amount to an actual write-off as required under section 36(1)(vii). The Tribunal emphasized that a debt must be both bad and actually written off before any deduction can be claimed. The assessee's alternative claim for treating the write-off as a business loss under section 28 was also rejected. The Tribunal's decision was upheld, concluding that the assessee did not fulfill the conditions for claiming a deduction for bad debts.

Conclusion:
The judgment addressed multiple issues related to the accounting and tax treatment of income from bill discounting, provisions for NPAs, lease equalization charges, and the write-off of bad debts. The Tribunal's decisions were largely upheld, emphasizing the adherence to the Income-tax Act over RBI guidelines and the necessity of actual write-offs for claiming deductions.

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