2013 (9) TMI 642 - AT - Income Tax

Clim of doubtful debts - NBFC - as per the mandatory requirements of directions of RBI, the assessee had made a provision for doubtful debts at a specified percentage based on the classification of assets viz. sub standard, doubtful and loss assets. The AO disallowed the assessee s claim treating the same as contingent liability. - Held that - this issue is covered against the assessee by the decision of Hon ble Supreme Court in the case of Southern Technology Ltd. 2010 (1) TMI 5 - SUPREME COURT OF INDIA , wherein it was held that Provision for non-performing assets in terms of the Directions of the Reserve Bank of India does not constitute expense on the basis of which deduction can be claimed by the non-banking financial companies u/s 36(1)(vii) of the Act. - Decided against the assessee. Accrual of Interest on sticky loans and advances - CIT deleted addition - Held that - non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. There is no inconsisteny or contradiction between the circular so issued and section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to sec. 145 of the Income tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and is, therefore, validly issued u/s119 of the Income-tax Act. As such, the circular would be binding on the Department - Following decision of UCO Bank vs. CIT 1999 (5) TMI 3 - SUPREME Court - Decided against Revenue. Computation of book profit - Minimum alternate Tax (MAT) u/s 115JB - Held that - the decision of Special Bench in the case of Usha Martin Ind. Ltd. (2006 (12) TMI 171 - ITAT CALCUTTA) is not applicable. - AO had rightly added both the provisions debited to Profit & Loss Account viz. provision for doubtful debts (Rs. 3,61,30,700/-) and provision for servicing securitized assets as both the provisions resulted into diminution in the value of assets.

Summary

Issues Involved: Disallowance of depreciation on leased cars, provision for doubtful debts, interest on sticky loans, and levying of interest under section 234D.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Leased Cars:
The assessee company claimed depreciation on leased vehicles, but the AO denied the claim, treating the lease transactions as finance transactions. The AO's reasons included that vehicles were registered in the lessee's name, delivered directly to lessees, and lessees bore insurance and repair costs. The CIT(A) upheld the AO's decision. The assessee argued that the Supreme Court in ICDS Ltd. vs. CIT ruled that ownership remained with the lessor, entitling them to depreciation. However, the Tribunal found differences in the lease agreements and remanded the issue back to the AO for re-examination in light of the Supreme Court's decision in ICDS Ltd.

2. Provision for Doubtful Debts:
The assessee claimed deductions for provisions for doubtful debts based on RBI's prudential norms. The AO disallowed the claim, treating it as a contingent liability. The CIT(A) upheld this view, noting that such claims could only be considered when accounts are written off. The Tribunal referenced the Supreme Court's decision in Southern Technology Ltd., which held that RBI's prudential norms are for disclosure purposes and do not affect the computation of taxable income under the Income Tax Act. Consequently, the Tribunal dismissed the assessee's claim.

3. Interest on Sticky Loans:
The assessee did not recognize income from sticky loans based on RBI guidelines, arguing that such income had not accrued. The AO added the interest on sticky loans to the income, following previous assessments. The CIT(A) reversed this, citing the Supreme Court's decision in UCO Bank vs. CIT, which stated that interest on doubtful loans should only be added to income when actually received. The Tribunal upheld the CIT(A)'s decision, emphasizing that hypothetical income should not be recognized under the mercantile system.

4. Levying of Interest under Section 234D:
The AO levied interest under Section 234D, which the CIT(A) confirmed. The Tribunal upheld this decision, referencing Explanation 2 to Section 234D, inserted by the Finance Act, 2012, with retrospective effect from June 1, 2003, which clarifies that Section 234D applies to assessments completed after this date, even if the assessment year commenced before it.

Department's Appeal on Interest on Sticky Loans:
The Department contended that the CIT(A) erred in deleting the addition of interest on sticky loans, arguing that income must be included on an accrual basis. The Tribunal dismissed this ground, reaffirming that interest on sticky loans should only be recognized upon actual receipt, in line with the Supreme Court's ruling in UCO Bank vs. CIT.

Provision for Doubtful Debts and Servicing Securitized Assets under Section 115JB:
The AO denied deductions for provisions for doubtful debts and servicing securitized assets while computing book profits under Section 115JB, treating them as unascertained liabilities. The CIT(A) allowed the appeal based on previous decisions. However, the Tribunal noted that Clause (i) of Explanation 1 to Section 115JB, as amended by the Finance Act, 2009, requires adding back provisions for diminution in asset value to book profits. Thus, the Tribunal reversed the CIT(A)'s decision, allowing the AO's addition of these provisions.

Conclusion:
The Tribunal's judgment involved detailed analysis and application of Supreme Court precedents, resulting in partial allowances and dismissals of the assessee's and Department's appeals. The issues of depreciation on leased vehicles and provisions for doubtful debts were remanded for re-examination and dismissed respectively, while the interest on sticky loans was upheld in favor of the assessee. The Department's appeal on Section 115JB adjustments was allowed, reversing the CIT(A)'s decision.