9911796707
TMI Blog2003 (3) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with Reserve Bank of India. 2. The Ld. CIT(A) has erred in law and on facts in confirming the order of Assessing Officer at pages 3 and 4 that the directions of RBI on prudential norms of income recognition is not applicable to the appellant company thereby (1) Lease rental Rs. 29,56,968 Interest on lCD's Rs. 50,34,796 (2) Bill discounting charges not Rs. 96,61,901 realized over six months ----------------- Rs. 1,76,53,665 ----------------- All to totalling to Rs. 1,76,53,665 accrued to the appellant and held as income during the assessment year 1998-99. Further detailed submission would be made during the hearing against this addition. 3. The Ld. CIT(A) should have appreciated the legal position resulting from section 45JA introduced from 9-1-1997 in the Reserve Bank of India Act, 1934 read with section 45Q existing in the same Act from 6-12-1964 has an overriding effect on the Income-tax Law and consequently, the prudential norms issued in terms of section 45JA has to be applied and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intenance of Rs. 1,98,019. 9. The Ld. CIT(A) should have allowed the bad debts written off entirely as claimed by the assessee of Rs. 23,68,314. 10. The bad debts of Rs. 23,12.412 should have been allowed by virtue of section 36(2) of the Income-tax Act, 1961 where the Income-tax Act after the amendment in 1989-90 onwards required only write off for claiming the bad debts. 11. The above grounds are independent and without prejudice to one another. 12. The charging of interest under sections 234A and 234B are wrong and bad in law. Full arguments will be advanced at the time of hearing. 13. The appellant prays to add, amend, alter, forego any of the above grounds at the time of hearing: 3.1 The relevant facts of the present appeal are that the assessee filed a return of income on30-11-1998declaring a total loss of Rs. 4,04,239. The case was fixed for scrutiny and notice under section 143(2) etc. were issued. The Assessing Officer observed that the assessee has shown income from business. He further observed that in the year under consideration, its main activities were of leasing of assets, discounting of bills and advancing of loans. The various incomes shown were Rs. 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'A' to the assessment order. The auditors mentioned vide paragraph 2 as under: "...We report that the company has applied for registration with Reserve Bank ofIndiaas a non-banking Financial Institution company which is pending as on date...." 3.5 Thus, in view of the fact that in the year under consideration, the assessee was not registered and recognized as NBFC by the RBI, the Assessing Officer was of the view that the question of applicability of NBFCs Prudential Norms (Reserve Bank directions), 1998 does not arise. 3.6 The Assessing Officer was further of the view that even though the assessee may have accounted the income as per the notification of the bank but for arriving at the correct profit of the company or the correct assessment of the income earned by the company, the provisions of the I.T. Act are to be applied rather than any other contrary view taken by any notification. 3.7 The Assessing Officer was also of the view that the Income-tax Act is a Statute passed by the Parliament and it cannot be governed by any notification issued by any other agency. Reliance was placed upon the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals Fert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration is issued to it. He further took into consideration that proviso to subsection (2) states that any non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 shall make an application for registration to the bank before the expiry of six months from such commencement and notwithstanding anything contained in sub-section (1) may continue to carry on the business of non-banking financial institution until a certificate of registration is issued or rejection of application for registration is communicated to it. 4.5 It was stated on behalf of the assessee that the assessee was carrying on business on the commencement of the Reserve Bank ofIndia(Amendment) Act, 1997. Accordingly, the issue of registration certificate was a mere formality. In view of the fact that in the instant case, the RBI has rejected the application and the matter has been remanded back to the Government of India which is the appellate authority, accordingly, the CIT(A) was of the view that as on the date of the accounting year i.e. 31st March, 1998, the assessee-company was not registered as non-banking financial company and consequently, the directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention was put forth that "accrual" refers to total income assumption that revenues and costs are accrued i.e. recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate. The accounting policy by the notification though broadly worded does not define the expression "mercantile system of accounting" and thus, in the absence of definition of "mercantile accounting system", it should be viewed in wider perspective. 4.9 The assessee before the CIT(A) also raised the contention that section 45Q Chapter IIIB of Reserve Bank of India Act overrides the other laws. The following contention was made: "(v) That as the provision of section 45Q, Chapter IIIB of Reserve Bank of India Act override the other laws and is reproduced as below: The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for time being in force or having any instrument having effect by virtue of any such law." 4.10 Thus, the contention raised was that since Chapter IIIB has an overriding effect on any other Act which is inconsistent with Chapter IIIB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998 have been issued under delegated legislation were not relevant. He took into consideration the decision of theApex Courtrendered in Rajnarain Singh v. Chairman, Patna Administration Committee AIR 1954 SC 569 at pages 573 and 574. Thus, the directions given by the RBI were considered not relevant in view of the special provision enumerated in section 145(2) of the Income-tax Act. He based his reasoning on the fact that a special enactment or rule cannot be held to be overridden by a later general enactment. He was of the view that section 45Q of the RBI Act, 1934 is a general enactment and it cannot override section 145 of the Income-tax Act, 1961 which is applicable with effect from1-4-1997. Thus, the guidelines issued under deleted legislation by RBI who was considered to be the outside party with reference to the Legislature, the CIT(A) was of the view that it cannot make law which can override the law made by the Parliament. 4.15 The CIT(A) also took into consideration the newly substituted section 43D which was applicable from 2000-2001 assessment year. 4.16 Having thus concluded on the applicability of directions issued by the RBI, the CIT(A) noting that the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the RBI Act, 1934 granted certificate of registration to the assessee. Accordingly, it was contended that the registration issued is now settled and since the pending application has been disposed of favourably, the registration having been granted to the assessee, the case of the Revenue does not stand. 5.3 Accordingly, it was contended that additions made by the Assessing Officer and confirmed by the CIT(A) comprising of lease rental Rs. 29,56,968, interest on ICD's Rs. 50,34,796 and bill discounting charges not realized over six months amounting to Rs. 96,61,901 do not stand. 5.4 It was also contended that the CIT(A) has relied upon Schedule 11 para 6 of the audited balance sheet and the Note appended by the auditors which reads as under: "Lease rentals, interest and bill discounting charges not realized for more than six months has not been recognized as per RBI guidelines amounting to lease rentals of Rs. 29,56,968, interest on ICD Rs. 50,34,796 bill discounting charges at Rs. 96,61,901 totalling to Rs. 1,76,53,665." 5.5 Accordingly, it was contended that the reliance placed upon by the CIT(A) on the fact that the Income-tax Act in the facts will prevail upon the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting in those days. The present prudential norms issued by the RBI vide notification dated2-1-1998, it was contended, have been included in pages 10 and 22 of paperbook 1 and the guidelines dated30-6-1994which were previously applicable to non-banking financial companies are also contained in pages 23 to 27. 5.9 Referring to section 45Q of the RBI Act, it was contended that it is not uncommon that provisions of this nature which have an overriding effect are laid down in the enactment. Our attention was invited to section 18 of the Interest Tax Act, 1974. 5.10 Reliance was also placed upon the order of the Chennai Bench of the Tribunal in the case of Overseas San mar Financial Ltd. in [IT Appeal Nos. 280 and 1522 (Mad.) of 1999, dated 5-2-2001 wherein vide its order relating to assessment years 1995-96 and 1996-97, the applicability of prudential norms regarding doubtful debts had been considered. It was contended that therein, the Tribunal had held that the prudential norms applied and the claim based on the principles as such is allowable. 5.11 Reliance was also placed upon the interim order of the Chennai High Court so as to contend that non-banking financial company norms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended that section 145 under the special enactment is the only section which is to be considered and has been considered by the tax authorities. 6.3 On the aspect of accrual of income, reliance was placed upon Babulal Narottamdas v. CIT [1991] 187 ITR 473 (SC). Reliance was also placed upon CIT v. Hindustan Housing Land Development Trust Ltd. [1986] 161 ITR 524 (SC.) Chunilal V. Mehta Sons (P.) Ltd.'s case, Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC), 229 ITR 583 (SC) (sic) and State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC). Reliance was also placed upon United Commercial Bank's case. Our attention was also invited to section 43D of the Income-tax Act. Reliance was also placed upon 210 ITR 159 (sic). CIT v. Mercantile Bank Ltd. [1999] 237 ITR 676(Bom.) and Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428 (SC). 6.4 The reliance placed upon by the learned AR on the decision of the Madras High Court, it was contended, was misplaced as it was an interim order. Similarly, it was contended that in the Tribunal's order, the facts are materially different and it does not deal with that issue whether section 145 of the Income-tax Act or the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed back to the RBI by the concerned authority with the direction to reconsider the application of the assessee. Thus, the fact remains that on the date of filing of the return and on the date the CIT(A) considered the appeal of the assessee, the said certificate of reregistration was pending before the RBI. Accordingly, in this background, the tax authorities proceeded on the footing that since the assessee who is required as per the RBI Act, 1934 to obtain a certificate of registration which admittedly it did not have. As such, the view taken was that prudential norms issued under the powers vested to the RBI by the RBI Act, 1934 would not apply to the assessee. 7.3 In the course of the hearing, the assessee has placed on record the certificate granting registration No. B-14.02759 to the assessee to commence/ carryon the business on non-banking financial institution without accepting public deposits subject to the conditions given in the said certificate. The said registration is granted to the assessee on29th November, 2002. In the course of the hearing, it is noted that submissions were addressed at length on either side on various issues which may have been relevant at the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI which ultimately granted Registration. 7.8 Sub-section (2) of section 45-IA mandates that every non-banking financial company shall make an application for registration to the bank in such form as the bank may specify. It was an undisputed fact that the assessee was a non-banking financial company for the last so many years and in view of the change in law, it was required to obtain the certificate under sub-section (1) of section 45-IA. It is also an undisputed fact that the assessee moved a petition for obtaining the said certificate. 7.9 A perusal of sub-section (4) of the section 45-IA further states that the bank, for the purpose of considering the application for registration, may require to be satisfied by an inspection of the books of the non-banking financial company or otherwise that the following conditions are fulfilled:-- "(a) that the non-banking financial company is or shall be in a position to pay its present or future depositors in full as and when their claims accrue; (b) that the affairs of the non-banking financial company are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors; (c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the case may be, and such non-banking financia] companies shall be bound to follow the policy so determined and the direction so issued. (2) Without prejudice to the generality of the powers vested under subsection (1), the Bank may give directions to non-banking financial companies generally or to a class of non-banking financial companies or to any non-banking financial company in particular as to- (a) the purpose for which advances or other fund based on non-fund based accommodation may not be made; and (b) the maximum amount of advances of other financial accommodation or investment in shares and other securities which, having regard to the paid-up capital, reserves and deposits of the non-banking financial company and other relevant considerations, may be made by that non-banking financial company to any person or a company or to a group of companies." 7.11 It is also necessary to consider section 45Q which reads as under:-- "Chapter IIIB to override other laws.--The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overriding mandate of the section cannot be ignored. Accordingly, we are of the view that ignoring the provisions of Chapter IIIB of the RBI Act and the Prudential Norms issued by them from time to time in exercise of the power vested in them cannot be sustained. In these circumstances, the additions made by the Assessing Officer are not sustainable. 7.13 It may be pertinent to reiterate here that the purpose for which the RBI was constituted as laid out in the preamble of the said Act i.e., to regulate the issue of bank notes and for the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The act of determining the policy and issue directions under section 45JA for a certain class of companies which operate only in the event that a certificate of registration is granted to them by the concerned authority is a conscious and deliberate intention of the Legislature. Keeping in mind the fact that section 45Q clearly brings out this intention of the Legislature that anything inconsistent with the provisions of Chapter IIIB contained in any other law, it is not possible to env ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer disregarding the prudential norms. As such, ground Nos. 2, 3 and 5 raised by the assessee are allowed. Ground Nos. 1 and 7 which refers to the issue of Registration is pending requires no adjudication on account of the change in facts. Ground No.4 requires no adjudication. 7.16 As we have observed earlier, the decisions relied upon before us have been taken into consideration. Before parting, we would like to briefly discuss some of the decisions relied upon by the learned DR. 7.17 Heavy reliance has been placed upon the judgment of Assam Co. Ltd.'s case. The said decision was relied upon by the learned DR for the proposition that the delegated legislation cannot override substantive legislation i.e., the Income-tax Act. A careful perusal of this decision shows that herein there was a conflict between the Act legislated by the Central Government and the State Legislature. Their Lordships of the Apex Court after perusing the object and scheme of Assam Agricultural Income-tax Rules, 1939 came to the view that the said Act does not contemplate that the State tax authorities are empowered to recompute the agricultural income contrary to the computation made by the Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to prevail. As such, prudential norms being delegated legislation do not have any role. The principle enunciated in the said judgment vis-a-vis the facts of the case does not help the Revenue as here, both the Acts are of Parliament. In the earlier part of our order, we have discussed at length the impact of section 45Q of the RBI Act which gives an overriding effect to the provisions of Chapter IIIB of the RBI Act "on anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law". The judgment of theApex Courtin Assam Co.Ltd. s case or any other judgment for that matter does not lay down that the Income-tax Act cannot be included in "any other law". It is also not the case of the Revenue that the Prudential Norms issued by the Reserve Bank ofIndiasuffers from excess of delegation or that they are ultra vires the Act as they are inconsistent with it. We may add that apart from the fact that this was not the case of the Revenue but even if hypothetically it wanted to challenge the same, then, this is not the forum to do so. Thus, the principle of excessive delegation laid down by the Supreme Court als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d loss account for the calendar year 1949 and for later years as a contingent liability. The assessee in the meantime died in 1952 and the sum of Rs. 58,000 odd was received by his heirs in 1956. The Tribunal held that during the period 1949 to 1952, no income accrued to the assessee and the said sum accrued only the date the judgment of the High Court was pronounced. On a reference, the High Court reversed the decision of the Tribunal and held that the annual additional remuneration accrued to the assessee at the end of each accounting year. On appeal to the Supreme Court, the decision of the High Court was affirmed. Their Lordships were of the view that this income was actually earned by the assessee during the relevant accounting periods and accrued or arose during the end of each year irrespective of whether the company had actually paid the amount or not. Thus, the right to receive the additional remuneration arose only on the resolution and though the payment thereof was deferred on account of the pending litigation, the income accrued to the assessee at the end of each accounting year and was not postponed simply because a suit was filed by the shareholders challenging the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cles before the tax authorities, the disallowance for non-business purposes is justified. Accordingly, ground No.8 is rejected. 9.1 Ground Nos. 9 and 10 pertain to the claim of the assessee that bad debts written off should have been allowed to the assessee. 9.2 The relevant facts are that the Assessing Officer observed in the profit and loss account that the assessee has claimed bad debts to the tune of Rs. 23,68,314. He required the assessee to justify the said claim. He also required the assessee to show the copy of the account of such persons and the year in which the claimed debt has been shown as income. The assessee filed a reply dated13-11-2000. From a perusal of the same, it was noted that Rs. 23,12,412 pertained to the sister concern Tedco Press Pvt. Ltd. on account of interest receivable and bill discounting receivable from Tedco Press Pvt. Ltd. which had been written off. It was further observed that the letter of the Director regarding settlement of account did not show the amounts of interest receivable and bill discounting receivable from Tedco Press Pvt. Ltd. It also did not show the reasons for writing off the said amount. Apart from that, no copy of accounts s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee on account of the following: "6.5 I have considered the submissions made by the Ld. AR. of the appellant. According to the assessee the amounts written off were offered as income during earlier years for taxation. The letter written by Sh. A.K. Misra addressed to the assessee does not indicate anything about the dues relating to interest and bills receivables. Both M/s. Tedco Press Pvt. Ltd. and the appellate company are under the same management and Sh. A.K. Misra was heading these companies at the material time. The principal amount was converted into shares of the Tedco Press Pvt. Ltd. and shares were allotted in the name of Sh. A.K. Misra. The reasons for the allotment of shares in the name of Sh. A.K. Misra is not understood when the appellate company being artificial juridical person can hold the shares. The appellant has not furnished any documentary evidence to prove that the debt actually became bad. Further there was no dispute with regard to the debts incurred. Therefore, it cannot be presumed that debtor was not in a position to pay. Moreover the assessee is still having regular transactions with Tedco Press Pvt. Ltd. The entire transaction is a intercorpora ..... X X X X Extracts X X X X X X X X Extracts X X X X
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