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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 ..... er to the file of the Assessing Officer is correct in law ? In T. C. (A) No. 108 of 2002: (i) Whether the provision of Rs. 27,41,000 made pursuant to the prudential norms towards non-performing assets (NPAs) prescribed by the directions of the Reserve Bank of India is an allowable deduction under the Income-tax Act ? (ii) Whether the Tribunal ought to have considered the claim as allowable as a business loss under section 28 of the Income-tax Act, if not as a bad debt under section 36(1) (vii) of the Income-tax Act, 1961? (iii) Whether the order of the Income-tax Appellate Tribunal rejecting the Appellants 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 the Income-tax Appellate Tribunal is right in holding that Rs. 3,99,62,960 towards lease equalisation charges made as per the Institute of Chartered Accountants of India's guidance note is contingent in nature and, therefore, includible in computing "book profit" under section 115JA of the Income-tax Act ? In T. C. (A.) No. 109 of 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, it is required to comply with the RBI guidelines which includes recognition of issues and provisions for NPA. The assessee is aggrieved with regard to the additions made in view of the change in the method of accounting with regard to this discounting facility and disallowances of its claim relating to bad debts and lease equalization charges. Mr. P. J. Pardiwala, learned senior counsel made his submissions on behalf of the assessee and Mrs. Pushya Sitaraman, learned senior standing counsel on behalf of the respondent. Written submissions were also filed on behalf of both the parties. Submissions advanced were mainly with regard to the questions relating to bill discounting, lease equalization charges and write of bad debts. Bills discounting 4. Bill discounting is one amongst the various modes, viz., financing, engaged in by the assessee. We are concerned with the addition made on account of changing the method of accounting adopted by the appellant during the year under consideration. The Assistant Commissioner rejected the assessee's claim for change in the method of accounting and brought to tax, what he termed as additional finance charges and as additional income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue makes out a case that the accounts are not correct and complete or that the method employed is such that the true profits cannot be determined. Income accrues only when the assessee acquires an indefeasible right to receive the income. It is the case of the assessee that on the date when the bill of exchange is acquired, there is no such indefeasible right. What the assessee obtains is only an inchoate right to receive the face value of the bill on its maturity date, if the appellant continues to be the holder of the bill on such maturity date. According to the assessee, income cannot arise only from the purchase of the commodity, which is when the bill is transferred and if the bill is rediscounted prior to the maturity' date, then what the appellant receives is sale proceeds and the appellant's right to receive the sale proceeds would accrue on the date the rediscounting is done. It changed its method of accounting in accordance with the accounting standards issued by the Institute of Chartered Accountants of India It cannot be said that the accounts are not correct. According to the assessee, if the income is assessed on the date when the bill is acquired, it may dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of ownership to the buyer. However, there may be situations where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership. Revenue in such situations is recognised at the time of transfer of significant risks and rewards of ownership to the buyer. Such cases may arise where delivery has been delayed through the fault of either the buyer or the seller and the goods are at the risk of the party at the fault as regards any loss which might not have occurred but for such fault. Further, sometimes the parties may agree that the risk will pass at a time different from the time when ownership passes. 8. The use by others of enterprise resources yielding interest, royalties and dividends 8.2 Interest accrues, in most circumstances, on the time basis determined by the amount outstanding and the rate applicable. Usually, discount or premium on debt securities held is treated as though it were accruing over the period to maturity. 9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad) this court held that the assessee was carrying on a banking business held securities and shares as part of its stock-in-trade or circulating capital, which were all along valued in its accounts maintained on the mercantile system. There was an abnormal fall in the securities in 1951-52 and the Reserve Bank of India allowed the scheduled banks like the assessee to value their holdings of securities at the current market prices and adjust the resulting loss against the current profits or against the amounts permitted to be drawn from the statutory reserves. The assessee claimed a business loss. The Department did not allow the deduction on the ground that the change in the basis of valuation was highly detrimental to the Revenue and that the assessee cannot be allowed to deduct one year, the loss attributable spread over many years and on the reference, the High Court held that (headnote) : "The Department was not, therefore, entitled to reject that system adopted by the assessee." 14. Now, let us look at the bills discounting facility and its nature since the Revenue had objected to any reliance being placed on the cases cited on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there the payability of the guarantee commission was a tentative right to receive the Commission for the unexpired period and the right became perfected and crystallize only with the expiry of the unexpired period and the date for the entire amount would arise only when the whole guarantee period is made in the complete round. But here, while discussing the advantages of bills discounting it is seen from the above that in the case of bills discounting the yield is at the time of discounting and it is higher than loans or advances. Questions Nos. (i), (iii), (iii) , (iii) in T. C. Nos. 107 to 110 of 2002, respectively, are answered against the assessee. Write off of bad debts: 16. With regard to the write off of bad debts, the assessee claims that 16 according to the prudential norms the non banking financial companies NBFCs) should classify the loans and advances into four broad groups and provisions should be made against the sub-standard assets, doubtful assets and loss assets. According to the assessee, these provisions had been made "as per the Reserve Bank of India norms" and the balance-sheets for relevant assessment years have also been produced. The balance-sheet reads th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim of the assessee. According to him, in the alternative, it should be allowed as a loss arising in the course of the business and must not be on capital account and relied on Devi Films P. Ltd. v. CIT [1970] 75 ITR 301 (Mad). 18. On the side of the respondent, it was submitted that the assessee had admitted that the amount shown as bad debts representing the write off made on the principal portion as per the Reserve Bank of India norms on asset classification and provisioning, and hence has not been shown as income in the earlier year. It was submitted that though the assessee had debited the profit and loss account it had not been written off and, therefore, what was made was only a provision. It was submitted that deduction on the basis of bad and doubtful debts is allowed by the statute only for banks and public financial institutions and not the non-banking finance company like the appellant and other assessees are entitled to write off only when the bad debt is written off as irrecoverable. It was submitted that we have to see whether under section 36(2)(i) permits the assessee to write off the bad and doubtful debts, even though they have not been offered to tax in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debt in question as irrecoverable in his accounts for the previous year. Hence, on the plain language of section 36(1) (vii) of the Act the debt cannot be allowed as a "bad debt". It may be that the assessee committed an inadvertent mistake, but we cannot go by notions of equity in tax matters. Making a provision is not the same thing as writing off a debt as irrecoverable." 23. This is squarely applicable to the facts on hand. In the present case, the debts are shown as written off on the basis of the formula given by the Reserve Bank of India. Writing off of the debt as bad requires judgment on The part of the person carrying on the business but, in the present case, the debts evidently have been "written off" merely on the basis of the Reserve Bank of India norms and nothing more. As far as the alternate submission that it should not be allowed as a trading loss, it was contended that there was no loss for the assessee as on date. 24. In T. C. (A) No. 141 of 2007 Sundaram Finance Ltd. v. Asst. CIT dated February 27, 2007, wherein the following substantial questions of law were raised, "(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im for bad debt allowance. To that extent, there is a clear departure from the scheme in the earlier Act. Still, so far as the exact requirement oft the writing off of the concerned debt as irrecoverable in the Account books of the assessee is concerned, the language used in both the Acts, viz., the Act of 1922 and the Act of 1961, is almost identical. The only requirement of section 36(2) (i) (b) is that the concerned bad debt must have been written off as irrecoverable in the accounts of the assessee. If the debit entries posted by the assessee indicate the said fact the requisite statutory condition has got to be treated as fully complied with. Once the assessee has posted entries in the profit and loss account and corresponding entries are posted in the bad debt reserve account that would be sufficient compliance with the provisions of the statutory requirement for writing off as irrecoverable the concerned debt in the books of the assessee. No further requirement can be spelt out from the express language used by the Legislature. It is not necessary that the assessee must also post corresponding entries in the ledger account of the concerned parties and should close those acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount financed. Therefore, the Institute of Chartered Accountants of India had recommended that every year as against the lease rentals taken to the credit of the profit and loss account, a matching lease annual charge shall be debited to the profit and loss account and this charge should represent a recovery of the net investment made by the lessor for the acquisition of the leased assets over the lease term and the annual lease rentals are to be calculated by reducing from the lease rentals the interest income earned for the year. Reliance was placed on Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC) to show that in determining the book profits the Assessing Officer is bound by the accounts adopted for the purposes of the Companies Act and the only adjustment that he is permitted to make are those referred to in the various clauses of the Explanation. He has also referred to CIT v. HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409 (SC) and contended that having regard to the nature of the lease equalization charge it cannot be treated as a provision for a liability but it is really an amount debited to the profit and loss account to match the revenues and costs so th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the guidance norms on accounting for leases. The Department concedes that the amount of lease equalization charges over the period of lease is equal to the difference between the quantum of principal recovered and the residual value. But hypothetically justifies its treatment as a reserve on the ground that there will be some years when the quantum of the provision is more than necessary. When the lease equalization charges is debited as per the guidelines and when the Department also admits the above, we cannot appreciate the stand of the Department that it should be treated as a reserve which stand that it is taking for the first time on the ground that there may be some years when the quantum of the provision is more than necessary. 34. From this, it is cleat that in accordance with the guidance note the appellant had debited the same on account of depreciation and lease equalization charges before determining the profits and in this kind of lease, the lessor recovers the entire cost of the leased assets over the period of lease along with the interest on the amount financed. 35. In HCL Comnet Systems' case [2008] 305 ITR 409 the Supreme Court held that a provision made "to ..... 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