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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 ..... o. Thus, RBI guidelines dt. 13th June, 1994 or issued subsequently u/s 45JA cannot override IT Act which is a Special Act and RBI is General Act in relation to IT Act. 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. Thus, it is clear that RBI guidelines alone are not sufficient for recognition of income on cash basis for the purpose of income-tax. There has to be a provision similar to s. 43D in case of NBFCs also. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) does is to preserve the right to carry forward the balance of the unabsorbed loss and unabsorbed depreciation in the relevant previous year to next year. Respectfully following the 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. Expenditure for purchase of software - In this case the assessee has leased out computer along with software. The life of software is not short as held in the case of Arawali Constructions Co. (P) Ltd., Maruti Udyog Ltd. and Company Law Institute. Therefore, the software purchased will be capital in nature. Accordingly, we do not find any infirmity in the order passed by authorities below. MAT - We find that this issue is covered by the decision of Special Bench of Tribunal, Hyderabad Bench, in the case of Dy. CIT vs. Nagarjuna Investment Trust Ltd.[ 1997 (4) TMI 115 - ITAT HYDERABAD] wherein it has been held that SOD is appropriate method to determine income of hire purchase transactions. Respectfully following the order of Tribunal. Hyderabad Bench it is held that the issue is covered against the assessee and in favour of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 recognised only when it is actually received. Learned Authorised Representative further submitted that where there was no certainty of recovery of the principal amount being non-performing assets, the recognition of income thereon would not have been proper. Therefore the reality of situation has to be considered while recognising the income from NPAs. Further the income on sticky loans would not be taxable in the hands of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the benefit of this provision was extended to public companies engaged in providing long-term finances to housing projects as approved by National Housing Bank. Further he submitted that if the guidelines issued by RBI could suo motu overrule, the specific provision of s. 145 of IT Act, 1961, there was no need of introducing s. 43D by the Finance Act, 1991 and later on modify it by extending the benefit to some more class of assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (India) and generally to operate the currency and credit system of the country to its advantage . Thus he submitted that the introducing of RBI Act was never to determine the taxable income of any entity in the country for which a self-contained code by itself i.e. IT Act, 1922 was in place. The heading given in s. 45JA is power of bank to determine policies and issue direction . Further heading of Chapter IIIB of RBI Act, which contains this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 Representative replying to the reliance placed by the learned Authorised Representative of the assessee on the decision of the various Tribunals submitted that in the case of Tedco Investment Financial Services (P) Ltd. vs. Dy. CIT submitted that in this case Tribunal went by the presumption that IT Act is a General Act and RBI Act being a Special Act, will override the provisions of General Act i.e. IT Act. Since this presumption itself is wrong, the whole basis of order and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. He also relied on the unreported decisions of Madras High Court in the case of T.N. Power Finance Infrastructure Development Corporation Ltd. vs. Jt. CIT reported now in (2006) 280 ITR 491 (Mad) and in the case of Southern Technologies Ltd. vs. Jt. CIT (T.C. No. 1 of 2002, dt. 23rd Jan., 2002) wherein Hon'ble jurisdictional High Court upheld the findings of CIT(A) to the extent that RBI directions cannot override the mandatory provisions of the IT Act. 13. We have heard both the parties a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets: 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) Loss assets: An asset which is considered uncollectible although there may be some salvage value or recovery value. RBI guidelines also prescribed guidelines for provisioning of bad and doubtful debts as under: (i) Loss assets: The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 per cent of the outstanding should be provided for. (ii) Doubtful debts: (a) 100 per cent of provision to the extent of which the advance is not covered by the reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regulating NBFCs is sufficiently wide. The working group on financial companies appointed by Reserve Bank of India (RBI) under the chairmanship of Dr. A.C. Shah had suggested regulatory and control measures to ensure the healthy growth and operations of these companies. Despite the [provisions before the promulgation of the RBI (Amendment) Ordinance, 1997] contained in Chapter III-C of the RBI Act, the unincorporated bodies circumvented the statutory restrictions by floating different partnership firms as and when a firm reached the level ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem 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 resolve the same. 17. The classification of a statute whether a general statute or a special statute has to be made with reference to the context in each case and the subject matter dealt with by each statute. As Justice Ramesan has pointed out in Thammayya vs. Rajah Tyadapasupati AIR 1930 Mad 963, most Acts can be classed as General Acts from one point of view and Special Acts from another. For example it may be argued as he says that the Contract Act which is applicable to all is general in relation to the Labour Act which is limited to the relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 credited to P L a/c. In case of an asset if interest is not received for six months it is to be treated as NPA. The assessee had not credited income to P L a/c following RBI guidelines. As we have already held that RBI guidelines are for the purpose of supervision, management and control of monetary and credit system it would not stop accrual of income under s. 5 of the IT Act. If RBI guidelines were to stop the accrual of income under s. 5 of the Act, it would have mentioned so. Thus, RBI guidelines dt. 13th June, 1994 or issued subsequently under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;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 that RBI guidelines alone are not sufficient for recognition of income on cash basis for the purpose of income-tax. There has to be a provision similar to s. 43D in case of NBFCs also. 21. The next contention of the assessee is that it has not recognised income as there was no certainty of recovery of interest when principal amount was doubtful of recovery. The assessee is engaged in the business of money-lending. When the principal amount becomes bad, such amount along with interest can be written off as bad debts in the books of account and assessee can claim deduction unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 decision of Hon'ble Madras High Court in assessee's own case will not be applicable for asst. yr. 1997-98. Admittedly the assessee is following mercantile system of accounting and therefore assessee was required to credit the income accrued on non-performing assets to P L a/c. Accordingly, we do not find any force in the submission of the learned Authorised Representative of the assessee. 24. Further it has been submitted that when there was uncertainty of recovery, the concept of real income is to be applied and therefore, no income has accrued to the assessee in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 Delhi Bench 'B' in the case of Tedco Investment Financial Services (P) Ltd. vs. Dy. CIT, wherein it has been held that IT Act is a General Act and RBI Act is a Special Act. We, after examination of the nature and field of operation of both the Acts, have held that the IT Act is a Special Act and RBI is a General Act. Thus the guidelines issued under s. 45JA of the RBI Act are general to be followed by NBFCs. Moreover, the Tribunal has relied on the decision of Tribunal Chennai in the case of Overseas Sanmar Financial Ltd. vs. Jt. CIT which relates to asst. yrs. 1995-96 and 1996- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 total income of an assessee which has been either received or accrued shall be computed in accordance with the provisions of s. 145 of the Act. Accounting Standards 1 and 2 under sub-s. (2) of s. 145 of the Act, have been issued in consultation with the Institute of Chartered Accountants of India. Therefore, once income which has accrued shall be included in total income. The assessee cannot postpone the income on receipt basis except in the cases of assessee covered by the provisions of s. 43D of the Act. This view is supported by the decision of Special Bench in the case of Dy. CIT vs. Nagarjuna Investment Trust Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 provisions of s. 36(1)(viia) of the Act. In view of above discussions and the decision of Hon'ble Madras High Court, it is held that RBI guidelines will not override the mandatory provisions of s. 145 of the Act. Since the assessee is following mercantile system of accounting, the interest income on NPAs will be assessed to tax on accrual basis. 31. The alternative argument of learned Authorised Representative of the assessee is that if the contention of the assessee for recognition of income on receipt basis is not accepted, the amount of interest should be treated to have been written off. We are unable to accept this ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 softwares is not for a long period and therefore no asset of enduring nature has come into existence. On the other hand learned Departmental Representative relying on the decision of Hon'ble Rajasthan High Court in the case of CIT vs. Arawali Constructions Co. (P) Ltd. (2002) 177 CTR (Raj) 79 : (2003) 259 ITR 30 (Raj), Maruti Udyog Ltd. vs. Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 ITD 119 (Del), Jt. CIT vs. Company Law Institute, ITA No. 1752/Mad/2000 submitted that purchase of software was a capital expenditure. 34. We have heard both the parties. In this case the assessee has leased out computer along with software. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Chowringee Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC). The learned CIT(A) allowed the claim of the assessee following the decision in the case of Sundaram Finance Ltd. 38. Before us it has been submitted by learned Departmental Representative that assessee collected sales-tax on certain hire purchase transactions. This was not paid to the Government and instead kept as contingency account with the assessee. The amount was not offered as income on the plea that the matter was still in Court and had not reached finality. He further submitted that this issue is covered by decision of Hon'ble Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on hire purchase transaction was liable to be taxed as trading receipt. Accordingly the learned CIT(A) was not justified in deleting the addition. We, therefore, set aside the order of learned CIT(A) and restore the order of AO on this issue. 40. The next issue relates to higher rate of depreciation on leased vehicles. We find that this issue is covered against the Revenue and in favour of assessee by the decision of Hon'ble Madras High Court in the case of CIT vs. Madan Co. (2002) 174 CTR (Mad) 172 : (2002) 254 ITR 445 (Mad). Respectfully following the decision of jurisdictional High Court, it is held that assessee is entitled for hig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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