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TMI Blog2009 (2) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... y were not deductible u/s 36 – In respect of lease equalization charge, when these charges were debited according to the RBI guidelines and when the department also admitted it, the amount could not be added back to profits of company under section 115JA - 107 to 110 of 2002 and 175 to 178 of 2003 - - - Dated:- 9-2-2009 - MRS. PRABHA SRIDEVAN and K. K. SASIDHARAN JJ. P. J. Pardiwala, senior counsel for K. Venkataraman for the appellant. Mrs. Pushya Sitaraman, senior standing counsel, for the respondent. JUDGMENT The judgment of the court was delivered by 1. MRS. PRABHA SRIDEVAN J. - The appeals have been admitted on the following substantial questions of law: In T. C. (A). No. 107 of 2002: (i) Whether the order of the Income-tax Appellate Tribunal rejecting the appellant's method of accounting income from discounting of bills and holding that the whole of the income from bill discounting accrues at the time of discounting bill and not over the period of discount is correct in law? (ii) Whether the order of the Income-tax Appellate Tribunal in reversing the decision of the Commissioner of Income-tax (Appeals) in allowing: the claim for 100 per cent .d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India is an allowable deduction under the Income-tax Act ? (ii) Whether or not Chapter III-B of the Reserve Bank of India Act has an overriding effect over other laws inclusive of the Income-tax Act, 1961? (iii) Whether the order of the Income-tax Appellate Tribunal rejecting the appellant's method of accounting income from discounting of bills and holding that the whole of the income from bill discounting accrues at the time of discounting bill and not over the period of discount is correct in law. (iv) Whether in computing the book profit under section 115JA, the provision of Rs. 50,95,991.towards NPA and Rs. 5,52,40,154 debited to PRL towards lease equalisation charges should be excluded ? 2. The question relating to bills discounting facility arises in T. C. (A) Nos. 107 to110 of 2002 and will be dealt with by a common order. Similarly the question relating to write off of bad debts arises in T. C. (A) Nos. 108 to 110 of 200 and will be dealt with by a common order and finally the question relating to lease equalization charges arises in T. C. (A) Nos. 108 and 110 of 2002 and will be dealt with by a common order. 3. The assessee is a non-banking finance compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when it is accepted that the assessee could change the method of accounting and had done so and when the Commissioner of Income-tax (Appeals) had found that the system had been changed only to bring it in line with the accounting standards then the assessee's claim must be accepted. He also submitted that if the income received by the assessee on the bills is compensation for use of money then it must be spread over the entire period. He also submitted that income accrues to the assessee only when the assessee receives the bill value at the end of the period of bill or earlier and that accounting system 9.4 is mandatory and there would not be certainty only at the date of discount. The learned senior standing counsel submitted that the discounting of bills is not equal to encashment of the bill and bill discounting is a separate transaction and what is received by the assessee on the date of purchase of the bill alone should be considered. 6. According to the assessee, as the recognition of the income in its entirety at the stage of acquisition did not reflect the true profits, the appellant changed its accounting policy of recognizing this income with effect from the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate, etc., the only certainty is the point of discount, and as such, when there is no dispute that the discounted amount is a taxable receipt in the hands of the assessee, it is the point of discounting at which it should be taxed, as that is the point at which he becomes entitled to it. As held by the Tribunal, the transaction of discounting of a bill is completely different from the encashment thereof, as the encashment could be from and by different persons altogether than the person who originally discounted the bill, and the person who received the amount. It was also submitted that in the cases cited by the assessee, the instruments were bonds, debentures and the other interest on securities as also guarantee commission and they cannot be relied on in this question. 7. The relevant accounting standards are extracted below : 9.5. When recognition of revenue is postponed due to the effect of uncertainties, it is considered ac revenue of the period in which it is properly recognized. 6.1 A key criterion for determining when to recognize revenue from a transaction involving the sale of goods is that the seller had transferred the property in the goods to the buyer for a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies is taxable only on specified dates when it became due for payment and not on accrued basis ?" On appeal, the High Court held (page 138), "… dismissing the appeal, that even though section 18 of the Act was deleted, the assessee was taxable for interest on securities only on specified dates when it became due for payment, in view of the third proviso to section 145(1) of the Act, which was in force during the relevant assessment years." 11. In CIT v.Bank of Tokyo [1993] 71 Taxman 85 (Cal), the assessee, a banking company had shown in its accounts deferred guarantee commission receivable in the accounting year relevant to the assessment year in question, it made provision for unexpired portion of guarantee and submitted that the guarantee commission receivable in respect of future period should not be taxed in the said year, since it was following the mercantile of account. 12. The Calcutta High Court held that the Tribunal was justified in holding that the income from deferred guarantee commission did not accrue or arise in the year when the guarantee agreements were entered and that the same should be spread over the period to which the guarantee commission rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following table below shows the difference in return, per cent. year between interest on loans and discount on bills : By interest per cent. By discount per cent. By interest per cent, By discount per cent. 1 1.0101 6 6.3829 2 2.0408 7 7.5268 3 3.0927 8 8.6956 4 4.1666 9 9.8901 5 5.2631 10 11.1111 (f) New accounts.- Precautions in discounting bills Customer's account credited.-When a banker decides to discount a bill, he will proceed to credit his customer's current or overdraft account with the amount of the bill, less discount charged. The bill is then entered in the bills receivable book, and its date of maturity noted in the bills receivable diary." 15. Therefore, the Tribunal was right in holding that the transaction of discount is complete at the moment, the customer is given 90 per cent. of the value of the bill. The discount is equivalent to the interest. What can be seen from the extracts of Tannan's Banking is that the accrual of this is certain and arises on the date on discount itself. The Tribunal was right i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant has debited the same to his profit and loss account, there is a write off as contemplated in the section and they referred to CIT v. Jwala Prasad Tiwari [1953] 24 ITR 537 (Bom) and Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 [ 95 (Guj) wherein this court has held that a debt is said to be written off as irrecoverable when it is debited to the profit and loss account and it was immaterial as to what account is credited. 17. According to the assessee, the view expressed by this court in CIT v. Micromax Systems P. Ltd. [2005] 277 ITR 409 was on a factually incorrect premise. He has further submitted that since the amount written off as bad debt represented money lent by the business of banking or money-lending that was carried on by the assessee, it cannot be disputed that this advance would not fulfil the condition provided for in the first part of clause (i) of section 36(2) and, therefore, it has to be allowed as a deduction. According to the assessee, the Explanation on which the Tribunal placed reliance would have no application when there is specific provision for compliance with the Reserve Bank of India directions. He also submitted that ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his year or other year, the assessee cannot Claim write off. 20. According to the learned senior standing counsel, the judgment reported in Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95 (Guj) will not apply since that was a case which arose under the old section 36(2) wherein it was held that posting of debit entries in the profit and loss account and credit entries in the bad debt reserve account will suffice to claim deduction and after the introduction of the explanation, it no longer possible to claim deduction unless there is an actual and total writ off. Further, it was submitted that the Bombay High Court dealt with a case where there was a factual finding that the debt had indeed become bad. 21 . According to the learned senior standing counsel CIT v. Micromax Systems P. Ltd. [2005] 277 ITR 409 (Mad) would apply and also Ahmedabad Electricity Co. Ltd. [2003] 262 ITR 97 (Guj) wherein it was held that (headnote) "a debt must be both bad and actually written off before any deduction can be claimed under section 36(1) (vii) read with section 36(2)." The writing off a trade debt as bad requires judgment on the part of the person carrying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature, and held that, there was no substantial question of law that arose for consideration. 26. In CIT v. Ahmedabad Electricity Co. Ltd. [2003] 262 ITR 97, the Gujarat High Court held that the debt in question had become a bad debt and whether the deduction was admissible in the context of section 36(1) (vii) and sub-section (2) of section 36 of the Act and held that in most cases the debt is a bad debt should suffice, when there are circumstances or material to indicate the reasonableness of the decision. But to support the claim for deduction it is not enough that the debt is bad. The bad debt must also be actually written off and necessary book-keeping steps must be taken to record that the debt has been determined and writing off a trade debt as bad requires judgment on the part of the person carrying on the business taking into consideration all circumstances as to the likelihood and cost of its recovery before a decision is taken to write off the debt and that, for a bad debt to be properly written off, it must be bona fide written off and that the evidence should establish that. 27. In Vithaldas H. Dhanjibhai Bardanzvala v. CIT [1981] 130 ITR 95 the Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Systems P. Ltd. [2005] 277 ITR 409, this court held (headnote): "(i) that the provisions of section 36(1)(viia) of the Income-tax Act, 1961, were not applicable to the assessee since the assessee was admittedly not a bank or a public financial institution. It was only a company manufacturing control systems and equipment. Therefore, only section 36(1)(vii) would apply to the assessee and not section 36(1) (viia). (ii) That since the assessee did not write off the debt in question as irrecoverable in its books of account for the previous year relevant to the assessment year 1997-98, the debt could not be allowed as bad debt on the plain language of section 36(1)(vii)." 29. In view of the above, questions Nos. (i) and (iii) in T. C. (A.) Nos. 108 to 110 of 2002 are answered against the assessee. Lease equalization charges: 30. As far as lease equalization charges are concerned, the Assessing Officer held that the provision for lease equalization charges was to be added back since the Act does not recognize the concept of these lease equalization charge. The Commissioner of Income-tax (Appeals) confirmed the decision of the Assessing Officer with regard to lease equa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he commencement of this Act; or (b) any amount retained by way of providing for any known liability is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision." 32. According to the appellant, the lease equalization charge has been made on the basis of the Reserve Bank Guidelines and on the basis of the opinion of the directors. As a sample we extract the treatment of lease equilization charge in the books as follows: Year Lease rentals A Income from Lease B Recovery towards principal in EMI A-B=1 Bank Depreciation @ 13.91% WDV 2 Lease equalization charge 1-2 Profit before tax 6 1994-95 2,149,800 2,138,000 707,300 695,500 11,800 1,442,500 12 1995-96 4,299,600 3,826,300 1,767,600 1,294,300 473,300 2,532,000 12 1996-97 4,299,600 3,043,700 2,370,100 1,114,200 1,255,900 1,929,500 12 1997-98 4,299,600 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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