2017 (7) TMI 144 - HC - Income Tax

Claim for deduction on account of the method for determining an NPA - entitlement to deduction on account of de-recognition of interest accruing upon NPAs applying Rule 6EB of the Income Tax Rules, 1962 - directions issued by the National Housing Bank under Section 30A read with 36 of the National Housing Bank Act, 1987 - Held that - In the present case, there is no doubt that Section 36 of the NHB Act states that the provisions of Chapter V of the NHB Act would have the effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. However, Section 30A of the NHB Act under which directions are issued by NHB to housing financial institutions, etc. does not contain a non-obstante clause. It is not meant to override Section 43D(b) of the Act in the matter of computation of taxable income. Section 43D of the Act read with Rule 6EB is a complete Code in itself. There is an element of discretion for the rule making authority to follow or not to follow the NHB guidelines as and when they are revised. The purpose of classification of debts as NPA by the NHB and the purpose for non-recognition of income for the purposes of the Act are different. Given the wording of the relevant provisions of the Act and the NHB Act, it is not possible to agree to HUDCO s proposition that with every change in the NHB guidelines there would be a corresponding automatic change in Rule 6EB. As pointed out by the ITAT, the real income principle would have no application as far as Section 43D of the Act. A distinction is required to be drawn between the concept of deductions claimed under the Act which has to satisfy the conditions laid down therein to qualify as such and the prudential norms that the NHB Act may lay down for determining an NPA. The present case is similar to Southern Technologies Ltd. v. CIT (2010 (1) TMI 5 - SUPREME COURT OF INDIA) where the Supreme Court had to deal with the claim for deduction on account of the method for determining - Decided in favour of the Revenue and against the Assessee.

Summary

Issues Involved:
1. Entitlement to deduction on account of de-recognition of interest accruing upon Non-Performing Assets (NPAs).
2. Applicability of Rule 6EB of the Income Tax Rules, 1962 versus guidelines issued by the National Housing Bank (NHB).

Detailed Analysis:

1. Entitlement to Deduction on Account of De-recognition of Interest Accruing upon NPAs:
The primary issue in these appeals by HUDCO concerns the treatment of interest corresponding to bad and doubtful debts, known as NPAs. HUDCO claimed deductions based on NHB guidelines, which classified debts as NPAs if interest was not received for more than 90 days. The Assessing Officer (AO) and subsequent appellate authorities, however, relied on Section 43D of the Income Tax Act and Rule 6EB of the Income Tax Rules, which required a debt to be classified as an NPA if interest was due for more than six months. Consequently, the AO disallowed 50% of the claimed de-recognition of interest, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT).

2. Applicability of Rule 6EB versus NHB Guidelines:
HUDCO argued that its accounts were maintained as per NHB directions, which should override other laws concerning income recognition due to Section 36 of the NHB Act. The contention was that the NHB guidelines mandated the classification of NPAs if interest was not received for more than 90 days, and this should be considered for tax purposes. However, the court noted that Section 43D(b) of the Income Tax Act, read with Rule 6EB, governs the recognition of interest income for NPAs. The court emphasized that the NHB guidelines do not automatically amend Rule 6EB, as the guidelines are to be considered ("having regard to") but not necessarily incorporated into the Rules.

Legal Reasoning and Conclusion:
The court referred to several precedents to support its decision. It highlighted the Supreme Court's interpretation of "having regard to" in Rajesh Kumar v. DCIT, indicating that the guidelines need not be identical to the Rules. The court also cited Southern Technologies Ltd. v. Asstt. CIT, which established that the RBI Act does not override the Income Tax Act. Similarly, in CIT v. Vasisth Chay Vyapar Ltd., it was held that RBI guidelines do not determine taxable income under the Income Tax Act.

The court concluded that Section 43D and Rule 6EB form a complete code for the recognition of interest income on NPAs, and there is no automatic incorporation of NHB guidelines into Rule 6EB. The real income principle does not apply to Section 43D, and the distinction between deductions under the Income Tax Act and prudential norms under the NHB Act must be maintained.

Judgment:
The court answered the framed question in the negative, favoring the Revenue and against the Assessee, thereby dismissing the appeals without any order as to costs.