2019 (10) TMI 352 - AT - Income Tax

Addition u/s 36(1)(viii) - creation and maintenance of special reserve - HELD THAT - Reserves are created as an appropriation out of Profit Loss Account and the terms Profit Loss Account General reserves as mentioned in the proviso could not be equated with each other, in the manner, as suggested by Ld. AR by relying upon the letter of Department of Company Affairs. The said circular, in our considered opinion, would have limited applicability in the context of which it has been issued and designed to apply in certain specific situation only. The expression used in the proviso are quite clear which mandates the inclusion of only the general reserves and nothing else. As per doctrine of literal interpretation, when the wordings in the statute are clear, the same has to be given the full effect. Therefore, we are unable to accept the arguments raised by Ld. AR, in this regard. Our view is duly supported by the cited decision of the Tribunal rendered on identical set of facts and circumstances. The coordinate bench has confirmed the stand of learned first appellate authority in excluding the balances in Share premium account, Profit Loss Account and special Reserve account while computing the general reserves. Nothing on record would suggest any change in facts or as to how the said ruling is not applicable to the facts of the case. Addition u/s 36(1)(viii) - year of assessment - HELD THAT - The assessee could transfer / withdraw amounts to / from special reserve, from time to time, as per its own decision convenience. The limit placed by proviso to Section 36(1)(viii) was to be seen with reference to indices standing in assessee s financial statements at year-end and the disallowance was to be worked out as per the proviso to Section 36(1)(viii) for each year separately. During the year, the assessee could transfer / withdraw any amounts from / to special reserve. Therefore, there is no force in the argument of double taxation as urged by Ld. AR before us. In our opinion, the disallowance was to be worked out for each year separately keeping in view the closing balances standing in relevant accounts in the financial statements. This ground is decided against the assessee. Computations u/s 43D read with Rule 6EB - whether in the matter of revenue recognition, NHB guidelines would prevail over express provisions of Rule 6EB or the income has to be recognized strictly as per Rule 6EB ? - HELD THAT - We are unable to accept the assertion that NHB guidelines would bring automatic corresponding change in Rule 6EB since, in our considered opinion, the discretion was left to the rule making authority to follow or not follow the NHB guidelines as and when they were revised since the substantive provisions uses the expression having regard to which would show the intention of legislature was to leave the discretion to the rule making authority. The said interpretation is in line with the decision of Hon ble Supreme Court in Rajesh Kumar V/s DCIT 2006 (11) TMI 135 - SUPREME COURT interpreting the expression having regard to . Finally, keeping in view the facts and circumstances and respectfully following the decision of co-ordinate bench rendered in GIC Housing Finance Ltd. V/s ADIT 2011 (2) TMI 40 - ITAT, MUMBAI we concur with the stand of Ld. first appellate authority in confirming the addition made by Ld. AO. At the same time, it is also true that some of the income may have been recognized by the assessee in subsequent years upon receipt of the same and the same would have been offered to tax in those years. However, upon perusal of quantum assessment order, we find that such income remained unquantified and therefore, no relief could be granted to the assessee, on this account. We are also not convinced with other arguments of Ld. AR that the deduction should be allowed as bad debts since the same would be governed by the requirements of Section 36(1)(vii)

Summary

Issues Involved:
1. Whether the balance in the Profit & Loss Account should be considered as part of "general reserves" under the proviso to Section 36(1)(viii) of the Income Tax Act.
2. Determination of the expression "general reserves" for AY 2005-06.
3. Alleged double disallowance of ?20.48 Crores under Section 36(1)(viii) for AY 2005-06.
4. Computation of interest on non-performing assets under Section 43D read with Rule 6EB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Profit & Loss Account as Part of General Reserves (AY 2004-05):

The primary issue for AY 2004-05 was whether the balance in the Profit & Loss Account should be included in the "general reserves" for the purpose of the proviso to Section 36(1)(viii). The assessee argued that all items classified under "Reserve & Surplus" except the Special Reserve should be considered as "General Reserves". The Tribunal noted that the term "General Reserve" is not explicitly defined in the Income Tax Act, but the expression "General Reserves" in plural indicates a specific meaning. The Tribunal concluded that reserves are an appropriation out of the Profit & Loss Account and cannot be equated with General Reserves. This interpretation was supported by the decision of the Bangalore Bench in the case of Canfin Home Finance Ltd. v/s DCIT. Consequently, the Tribunal dismissed the assessee's appeal on this ground.

2. Determination of General Reserves (AY 2005-06):

For AY 2005-06, the Tribunal noted that the issue of determining the expression "general reserves" was identical to AY 2004-05. Therefore, the Tribunal's adjudication for AY 2004-05 was applied mutatis mutandis to AY 2005-06, and this ground was decided against the assessee.

3. Alleged Double Disallowance (AY 2005-06):

The assessee contended that the disallowance of ?71.65 Crores for AY 2005-06 included ?20.48 Crores disallowed in AY 2004-05, resulting in double disallowance. The Tribunal found that the creation and maintenance of the special reserve was the assessee's decision, and the disallowance was to be worked out for each year separately based on the closing balances in the financial statements. Therefore, the Tribunal dismissed this ground, stating that there was no double taxation.

4. Computation of Interest on Non-Performing Assets (Section 43D read with Rule 6EB):

The assessee did not offer interest income on debts past due for 90 days, arguing that NHB guidelines should prevail over Rule 6EB, which prescribes a period of 180 days. The Tribunal noted that Rule 6EB, as per the Income Tax (Thirtieth Amendment) Rules, 1999, remained unchanged despite amendments to NHB guidelines. The Tribunal concluded that NHB guidelines do not automatically bring about changes in Rule 6EB, as the rule-making authority has discretion. This interpretation was supported by the decision in GIC Housing Finance Ltd. v/s ADIT. The Tribunal upheld the addition made by the AO, dismissing the assessee's appeal on this ground. However, the Tribunal acknowledged that some income might have been recognized in subsequent years upon receipt, but this remained unquantified.

Conclusion:

All grounds in both years were dismissed, and both appeals were partly allowed. The order was pronounced in the open court on 04th October 2019.