2021 (5) TMI 594 - HC - Income Tax

Provisions for NPA's debited to P L Account - Deduction for provision for bad and doubtful debt u/s 36(1)(viia) - Tribunal held that though the assessee has used the nomenclature as provision for non performing assets but in pith and substance, the provision has been created for bad and doubtful debts and in doing so the assessee has followed the guidelines framed by Reserve Bank of India as affirmed the finding recorded by the Commissioner of Income Tax (Appeals) - HELD THAT - This court in Canfin Homes Ltd. 2011 (8) TMI 178 - KARNATAKA HIGH COURT after taking note of Section 145 of the Act has held that once a particular asset is shown as non performing asset then the assumption that it is not yielding any revenue. When an asset is not yielding any revenue, the question of showing that revenue and paying tax would not arise. The contentions, which are sought to be raised by learned counsel for the revenue do not arise for consideration in the context of substantial question of law, which has been framed by this court. The concurrent findings have been recorded by the Commissioner of Income Tax (Appeals) as well as tribunal in this regard, which cannot be termed as perverse. Decided in favour of the assessee.

Summary

Issues:
1. Interpretation of provisions for NPA's debited to P & L Account for A.Y. 2010-11.
2. Treatment of provision for non-performing assets in the income computation sheet.
3. Application of Section 36(1)(viia) of the Income Tax Act, 1961.
4. Compliance with Reserve Bank of India guidelines for provision creation.

Issue 1: Interpretation of provisions for NPA's debited to P & L Account for A.Y. 2010-11
The High Court addressed the issue of interpreting provisions for Non-Performing Assets (NPAs) debited to the Profit & Loss (P & L) Account for the Assessment Year 2010-11. The Tribunal set aside the findings of the assessing authority regarding the provisions for NPAs, citing a decision of the Apex Court in the case of UCO Bank Ltd v/s CIT. The Court analyzed the submissions made by both parties, where the revenue argued against double deduction under Section 36(1)(vii) of the Act, while the assessee justified the accounting treatment of interest income on NPAs. The Court upheld the Tribunal's decision, emphasizing that the provision created for NPAs was in line with the guidelines of the Reserve Bank of India, and the findings of the Commissioner of Income Tax (Appeals) and the Tribunal were affirmed.

Issue 2: Treatment of provision for non-performing assets in the income computation sheet
The Court examined the treatment of a provision for non-performing assets in the income computation sheet. The assessee had debited a certain amount for provision for NPAs, which was not added back to the total income in the computation sheet. The Commissioner of Income Tax (Appeals) allowed the deduction for bad and doubtful debts under Section 36(1)(viia) of the Act, following the Supreme Court decision in UCO Bank Ltd. The Tribunal affirmed that the provision, though labeled as provision for NPAs, was essentially for bad and doubtful debts, complying with RBI guidelines. The Court concurred with these findings, holding that the revenue's contentions did not warrant consideration in the context of the substantial question of law framed by the Court.

Issue 3: Application of Section 36(1)(viia) of the Income Tax Act, 1961
The Court deliberated on the application of Section 36(1)(viia) of the Income Tax Act, 1961. The revenue argued against allowing double deduction under this section, while the assessee contended that the accounting treatment of interest income on NPAs was correct. The Court referenced various decisions and upheld the Tribunal's decision, emphasizing that once an asset is classified as non-performing, the assumption is that it does not yield revenue, justifying the treatment of the provision for NPAs as bad and doubtful debts.

Issue 4: Compliance with Reserve Bank of India guidelines for provision creation
The Court considered whether the provision for NPAs was created in compliance with the guidelines of the Reserve Bank of India. It was noted that the provision was made as per RBI norms, and the details of NPAs and provisions were provided. The Tribunal affirmed that the provision, though named provision for NPAs, was essentially for bad and doubtful debts, following RBI guidelines. The Court upheld these findings, concluding that the judgment in a related case was applicable to the present appeal for the year 2010-11, resulting in the dismissal of the appeal in favor of the assessee.