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TMI Blog2006 (3) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI and based on the guidelines issued by the Institute of Chartered Accountants of India and RBI, they have not recognised income in P&L a/c in respect of non-performing assets. The AO further noted that in earlier years similar disallowance was made which was confirmed by the learned CIT(A). Accordingly, he added the amount of Rs. 1,30,78,653/- being interest income on non-performing assets not credited to P&L a/c. On appeal, learned CIT(A) confirmed the additions following his orders for earlier years. 3. Before us learned Authorised Representative of the assessee submitted that assessee is recognised as non-banking financial company by RBI. The prudential norms for recognition of income, contained in the guidelines issued by RBI are binding on the assessee. The prudential norms issued by RBI vide their letter dt. 13th June, 1994 lay down the conditions for income recognition and accounting standards to be followed by NBFCs. As per the guidelines, an asset becomes non-performing when it ceases to yield income at least for six months and from such non-performing assets the income may not be recognised merely on the basis of accrual. The income from NPAs, therefore, should be rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4-95, Hon'ble Madras High Court has decided the case in favour of assessee. Since there is no change in method of accounting as compared to earlier years the assessee's case is covered by jurisdictional High Court. Therefore, assessee was justified in not recognising the income on NPAs. 6. Alternatively, it was argued that the amount advanced to various parties represents stock-in-trade (money) in the hands at the assessee. It the contention of the assessee is not accepted the amount of interest should be treated as deemed to have been written off in view of decision reported in CIT vs. Srivinayaga Pictures (1986) 54 CTR (Mad) 182 : (1986) 161 ITR 65 (Mad). 7. On the other hand Shri Shaji P. Jacob, senior Departmental Representative submitted that RBI guidelines could not override the mandatory provision of s. 145 of the Act. Referring to the legislative intention for inserting s. 43D, he submitted that the Finance Act, 1991, inserted a special provision w.e.f. 1st April, 1991, for recognition of income in case of a public financial institution, scheduled bank, state financial corporation, state industrial investment corporation etc. Later on through the Finance Act, 1999 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repeal of earlier Act by implication. This is against the Art. 143 of Constitution of India. Repeal, express or implied, cannot be delegated either by the Parliament or by State legislature (Art. 143 of the Constitution of India and Delhi Laws Act, etc. in the matter of AIR 1951 SC 332). 9. Another argument put forward by Shri P. Jacob is that the mandatory provisions cannot be overruled by RBI guidelines. Sec. 145 uses the word "shall" which mandates the method of accounting for all taxable entities in the country whereas RBI issues only guidelines which are directory in nature. If a provision is mandatory, an act done in breach thereof will be invalid, but if directory, the act will be valid although non-compliance may give rise to some other penalty if provided by the statute (C. Drigraj Kuer vs. Amar Krishna Narain Singh AIR 1960 SC 234 pp. 449, 451, Union of India vs. Tulsiram Patel AIR 1985 SC 1416). Learned Departmental Representative further drew our attention to the preamble of RBI Act, 1934 which reads as under: "Whereas it is expedient to constitute a RBI to regulate the issue of the bank notes and keeping of the reserve with a view to securing monitory stability in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule out the application of principles of reasonable construction to give effect to the purpose or intention of any particular provision as apparent from scheme of the Act. In support of his contention he placed reliance on the decision of Hon'ble Supreme Court in the case of Shree Sajjan Mills Ltd. vs. CIT & Anr. (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC). Further relying on the decision of Hon'ble Supreme Court in the case of CWS (India) Ltd. etc. vs. CIT (1994) 118 CTR (SC) 118 : (1994) 208 ITR 649 (SC) he submitted that the object of all the rules of interpretation is to give effect to the object of the enactment having regard to the language used. Where a literal interpretation leads to absurd or unintended result, the language of the statute can be modified to accord with the intention of Parliament to avoid absurdity. He also placed reliance on the decision of Hon'ble Supreme Court in the cases of CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC), K.P. Varghese vs. ITO & Anr. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) wherein it had been observed that the purpose for which a statute is enacted is relevant. 11. Learned Departmental Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procedure laid down by the RBI cannot be followed under the IT Act. The norms and various procedures prescribed by the RBI to its subsidiary or scheduled banks is in order to regulate effectively conduct of the business and to control the mandatory aspect of the company." Also submitted that in the case of Dy. CIT vs. Nagarjuna Investment Trust Ltd. (1998) 62 TTJ (Hyd)(SB) 33 : (1998) 65 ITD 17 (Hyd)(SB) held as under: "The term 'accrual' of income used in the Companies Act, as explained in the various accounting standards and as understood for the purposes of taxation laws in certain circumstances may have different meanings depending on the purpose of legislation, the context in which such expression has been used and on the interpretation of the terms of relevant contracts. For tax purposes, the accrual or receipt of income in the relevant previous year will have to be determined in consonance with the ambit of taxable income as per s. 5 of the Act on the basis of a careful scrutiny of the terms of contract for hire purchase and lease agreements regardless of the method of accounting followed by the assessee for recognition of such income on its books of account." H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as remained unpaid and has become 'past due'. An amount is to be treated as 'past due' when it remains unpaid for 30 days beyond the due date. The interest on NPAs should not be looked as income if such interest has remained outstanding for more than six months on and from 31st March, 1995. RBI guidelines also prescribe norms for identification as bad and doubtful and writing off in the books of account. Classifications of assets as per RBI guidelines are as under. (a) Standard assets: Assets in respect of no default in payment of principal or payment of interest is perceived which does not disclose any problems nor carry more than normal risk attached to the business. (b) Sub-standard assets: Sub-standard asset is one which has been classified as NPA for a period not exceeding two years. Term loans where interest and or instalments of principal are overdue for six months as on 31st March, 1995 should be treated as sub-standard. (c) Doubtful debt: A doubtful asset is one which has remained NPA for a period exceeding two years. Term loans where instalments of principal have remained overdue for a period exceeding two years should be treated as doubtful. (d) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the point of view of control of the credit policy. The Reserve Bank powers in relation to commercial banks should also be enhanced and extended in certain directions, so as to provide for stricter supervision of the operations and working of such banks. The bill seeks to achieve these objectives". Sec. 45JA was inserted by Amendment Act 23 of 1997-Statement of objects and reasons read as under: "The activities of the non-banking institutions and unincorporated bodies receiving deposits are regulated in terms of the provisions of Chapter III-B, and III-C of the RBI Act, 1934, respectively. Until recently the emphasis was on regulating the receipt of deposits by Non-banking Finance Companies (NBFCs) as an adjunct to credit and monetary policies and to provide indirect protection to depositors. However, experience has shown that the provisions were neither sufficient to regulate the business activities of these companies or do they provide adequate protection to depositors. The Joint Parliamentary Committee which enquired into the irregularities in securities and banking transactions had recommended that the Government should examine whether the legislative framework for regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dies having failed to repay the deposits collected from unsuspecting depositors who have been tempted by the attractive returns and incentives offered. Concern has been expressed in several quarters on the need to take urgent steps to regulate the activities of such companies and unincorporated bodies". 16. The plain reading of statement of objects and reasons for insertion of Chapter ill-B relating to NBFCs and s. 45JA makes it clear that the legislative intention was for effective supervision and management of the monetary and credit system by the RBI. Having dealt with the legislative intention of inserting Chapter III-B and s. 45JA relating to NBFCs in the RBI Act, 1934, the issue to be decided is whether there is any inconsistency between s. 145 of the IT Act and guidelines issued by RBI. In other words whether due to non obstante clause in s. 45Q of RBI Act, 1934, the guidelines issued by RBI Act, 1934, shall override the provision of s. 145 of the IT Act. In order to determine this issue we have to examine: (a) The nature of IT Act and RBI Act, whether Special Act or General Act. (b) Whether they operate in the same field. (c) If there is any inconsistency, how to res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o empower the bank to determine policies and issue directions relating to NBFCs. Heading to Chapter III-B also suggests the purpose or objectives to be achieved. Thus from the preamble and headings it can be made out that RBI Act operates in the field of monetary and credit system of the country. It was never intended for recognition of income for the purposes of IT Act. Thus both the RBI Act and IT Act operate in different fields and they stand for different and distinct purposes. In the case of Damodharan vs. State of Kerala AIR 1960 Ker 58, 60, Hon'ble Kerala High Court observed that when the purposes intended to be served are distinct and different and the two provisions can very well stand together whatever be their validity, there is no disharmony between them, and therefore, no scope for applying the principles of harmonious construction. Both the IT Act and the RBI Act operate in different fields without disobeying each other, can stand together. Hence there can be no inconsistency in the provisions. The question of harmonious construction of the provisions would arise when the provisions operate in the same field. 19. As per RBI Act, the income on NPAs is not to be cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient for recognition of income on cash basis for the purposes of income-tax. The income of such assessees was determined as per Circular dt. 9th Oct., 1984. Because of this reason s. 43D was inserted in the statute. RBI guidelines in case of NBFC are for the purpose of control and supervision with respect to public interest and viability of the NBFC. The guidelines never intended for taking the interest income accrued as per s. 5 of the Act out of the scope of IT Act. If the contention of assessee is accepted, it would amount to insertion of 'NBFC' in s. 43D of the Act, that too by a guideline issued for different purposes by an authority other than Parliament. In other words the doctrine of "casus omissus" will deem to have been applied which is contrary to law of land as propounded by the Hon'ble Supreme Court in the cases relied upon by the learned Departmental Representative. (i) Smt. Tarulata Shyam & Ors. vs. CIT (ii) CWT vs. K.S. Vaidhyanathan (iii) Padmasundara Rao (Decd.) & Ors. vs. State of Tamil Nadu (iv) Asstt. CIT & Ors. vs. Velliappa Textiles Ltd. & Ors. (v) Prakash Nath Khanna & Anr. vs. CIT & Anr. From the above discussion, it is clear t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of public and also safeguard the viability of NBFCs. Under RBI guidelines, opportunity is not given to the IT authorities for the simple reason that such guidelines are not intended to regulate IT laws. Under SICA once a scheme is approved with the consent of IT Department, recovery of tax demand cannot be effected. However, it does not stop the determination of a tax liability. Therefore, two schemes under SICA and RBI Act are not comparable. The assessee fails on this count also. 23. The next argument of learned Authorised Representative is that assessee has been following system of accounting continuously under which the interest income on NPAs was not recognised. In assessee's own case Hon'ble Madras High Court has upheld the claim of the assessee for earlier assessment years vide TC No. 774 and 349 of 2004. In this regard it is worth noting that from asst. yr. 1997-98 and onward, an assessee has to follow either the mercantile or cash system of accounting. The assessment year in which Hon'ble Madras High Court has decided the matter in favour of assessee pertains prior to asst. yr. 1997-98, where assessee could follow hybrid system of accounting. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis regularly employed by the assessee. If RBI guidelines are accepted it would result into hybrid system of accounting which is not permissible after 1st April, 1997. 26. Further, regarding the issue raised by learned Departmental Representative on delegated legislation, it has been submitted by Shri Vijayaraghavan, the learned Authorised Representative of the assessee that both the Acts are by Parliament and therefore it is incorrect on the part of Revenue to say that RBI guidelines will not override the IT Act. Learned Departmental Representative on the other hand submitted that if the contention of learned Authorised Representative is accepted it would amount to amendment of IT Act by an authority other than Parliament and is against the provisions of Art. 143 of the Constitution. Under Art. 143 of the Constitution, it is a settled law that Parliament cannot abdicate or delegate its legislative functions to outside authority. In view of foregoing discussions, we are in agreement with the submissions made by learned Departmental Representative that RBI guidelines cannot override the law made by the Parliament. Assessee has also placed reliance on the decision of Tribunal Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; (c) accrues or arises to him outside India during such year: Provided that, in case of a person not ordinarily resident in India within the meaning of sub-s. (6) of s. 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) ........................" The combined reading of provisions of ss. 5 and 145 of the Act shows that the total income of an assessee shall include the income on the basis of system of accounting regularly employed by him. Sec. 5 of the Act is enabling provision whereas s. 145 is machinery section, which provides the method of computation of income under the head "Profits and gains of business or profession" or "Income from other sources". Sec. 145 of the Act is not only for the purposes of recognition of income but also provides for the method of computation of income under the specified heads. Therefore, the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision for non-performing assets, which are of predominantly capital nature. If the ratio of decision of Hon'ble jurisdictional High Court is applied to the facts of the case, the provisions of s. 145 being mandatory in nature cannot be overridden by the RBI guidelines. For a moment, if it is considered that RBI guidelines would override the provisions of the IT Act, then in that situation the accrual of income taken place as per provisions of s. 5 of the IT Act and for the purpose of computation of income, the AO will have to refer to RBI guidelines. Such a conclusion will be not only absurd but against all principles of law. 30. From above discussion it is clear that the IT Act, 1961 is a Special Act. RBI guidelines have been issued under delegated legislation for the purpose of effective supervision and control of monetary and credit system. The RBI guidelines have not been issued to override the mandatory provisions of s. 145 of the Act. This view is supported by the decision of Hon'ble Madras High Court in the case of CIT vs. T.N. Power Finance & Infrastructure Development Corporation Ltd., wherein it has been held that RBI guidelines cannot override the mandatory pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of Hon'ble Supreme Court, the issue is decided against the assessee and in favour of Revenue. Accordingly the order passed by learned CIT(A) is upheld on this issue. 33. The next issue for consideration relates to expenditure for purchase of software claimed as revenue expenditure. The AO found that the assessee purchased software and used in the business of leasing and claimed the same as revenue expenditure. The claim as revenue expenditure was made on the ground that the software does not last long. The contention of assessee was rejected by AO on the ground that an asset of enduring nature came into existence and therefore the same was in the nature of capital expenditure. The claim of the assessee was also rejected by learned CIT(A) on the ground that the assessee leased out software along with hardware concerned and since the assessee had received lease rentals in the lease period for such composite lease of hardware and software, the AO was correct in disallowing expenditure as capital in nature. He however, directed the AO to allow depreciation on software as forming part of computer and its accessories. Before us, the assessee has submitted that the life of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce & Infrastructure Development Corporation Ltd. vs. Jt. CIT Hon'ble Madras High Court has held that merely because the RBI had directed the assessee to provide for non-performing assets, that direction could not override the mandatory provisions of the IT Act contained in s. 36(1)(viia), which stipulate a deduction not exceeding 5 per cent of total income only in respect of the provision for bad and doubtful debts, which are predominantly revenue in nature or trade related and not for provision for non-performing assets, which are of predominantly capital nature. Respectfully following the decision of jurisdictional High Court, it is held that provision made for bad and doubtful debts following the guidelines issued by RBI in respect of NPAs will not be allowable as deduction. 37. Now we will take Revenue's appeal in ITA No. 1978/Mad/2000. The first issue for consideration relates to sales-tax collected but not paid. The AO found that assessee was accumulating the sales-tax to contingency deposit and not offering the amounts collected for the purpose of income-tax. The AO brought the sales-tax amount to tax following the decision of Hon'ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is entered in the account books, which is decisive. Eventually if the amount so collected is passed on to the State Government or refunded to the purchasers, the assessee would not be entitled to claim deduction of the sum so paid or refunded. The ratio laid down by Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust was applied while deciding the issue in the case of K.C.P. Ltd. vs. CIT. In this case the assessee collected excess sugar price, which was not taken to P&L a/c. Hon'ble Supreme Court while upholding the order of Hon'ble Andhra High Court held that the amount was retained by assessee as price of the sugar sold by it though right of the assessee to realise the amount was the subject of dispute though the excess amount was retained in separate account that would not make any difference. Merely maintaining a separate account under a heading given by assessee would not alter the nature of receipt if it is actually a trading receipt. Respectfully following the decision of Hon'ble Madras High Court in the case of Southern Explosive Co. and decision of Hon'ble Supreme Court in K.C.P. Ltd., it is held that sales-tax collected ..... X X X X Extracts X X X X X X X X Extracts X X X X
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