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TMI Blog2006 (5) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... andMs. Sushma Suri for the Respondent. JUDGMENT B.P. Singh, J. - This appeal by special leave has been preferred against the judgment and order of the High Court of Judicature at Bombay dated 18-9-2003 in Writ Petition No. 2199 of 2003. The High Court by its impugned judgment and order dismissed the writ petition preferred by the appellant holding that the issues raised by the appellant in the writ petition were not justifiable in writ jurisdiction. 2. The appellant has appeared before us in person and argued his appeal. He claims to be a shareholder of the Development Credit Bank Ltd. Respondent No. 6 herein. In sum and substance, the grievance of the appellant in the writ petition was that the Reserve Bank of India being the statutory and regulatory authority, illegally approved the proposal of the Respondent No. 6 Development Credit Bank Ltd. for writing off of debts, amounting to Rs. 120 crores, of the Bank without following the proper procedures prescribed under the provisions of sections 13 and 14 of the Securitisation Act, 2002 and sections 19 and 31A of the Recovery of Debts Due to Banks Act, 1993. 3. To appreciate the grievance of the appellant it is necessary to notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment should be prominently disclosed in the Notes to Accounts. 6. After grant of approval by the Reserve Bank of India, the Annual General Meeting of the Company was held on 30-9-2003 and the write off of the bad debts was approved by the shareholders of the Respondent No. 6 Bank. 7. In the counter affidavit filed on behalf of the Reserve Bank of India before this Court, it has been stated that the Board of Directors of the Respondent No. 6 Bank and its principal shareholders approved the proposal to write off these debts by appropriating the reserves subject to receiving approval from the Reserve Bank of India. Referring to section 17(1) of the Banking Regulation Act, 1949, it was explained that every banking company incorporated in India must create the reserve fund and shall out of the balance of profit of each year as disclosed in the profit and loss account prepared under section 29 of the Act and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than 20 per cent of such profit. The said limit was raised to 25 per cent in December 1974. In terms of section 17(2), a banking company can appropriate sums from the reserve fund or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowers may continue. The write off does not bar the Bank from following up recoveries. Further recoveries, if any, in these accounts are credited to the income account, in turn improving the net worth of the Bank. Replying to the Petitioner's allegation that the Reserve Bank had failed to exercise its statutory powers and authority of law against the Bank under the various provisions of the Banking Regulation Act, 1949 to restrain it from taking any steps or acting in furtherance to write off the secured debts of the sum of Rs. 120 crores, which is detrimental to the interests of the Bank, its depositors, investors and shareholders, it was submitted that the banking companies do not need Reserve Bank's permission to write off bad debts. As mentioned earlier, the banking companies are also not under statutory obligation to seek the Bank's approval for appropriation of sums from their reserves. However, as a matter or practice, the banking companies do approach the Reserve Bank for permission, before utilizing their reserves, for writing off the bad debts and the Reserve Bank grants approval, if it is in order, on considering their financial position and other related factors as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to note that the audited profit and loss account and the balance sheet of the Bank were approved at the Annual General Meeting held on 30-9-2003 by an over-whelming majority of the shareholders, by show of hands and the appel-lant was present in the said meeting. It was therefore, submitted that the write off of the bad debts has also the approval of the shareholders of the Bank, and the same gives a true and fair view of financial position of the Bank. Such write off is also pre-eminently in the interest of the Bank and all its shareholders. 13. The Bank has, further, explained that almost 80 per sent of the NPAs bad debts relate to the loans advanced to 15 parties. The particulars about these 15 parties and the steps taken by the Bank to recover the amounts due, have been set out in the counter affidavit which was filed in compliance of the order of this Court dated 5-7-2004. 14. It will thus appear from the facts noticed above that the writing off of NPAs is an exercise undertaken to clean the balance sheet, and is an internal accounting procedure. It does not require the permission of the Reserve Bank of India but as explained by the Reserve Bank of India, banks usually make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines issued by the Reserve Bank of India, it is observed : "Writing -off of NPAs - In terms of section 43D of the Income-tax Act, 1961, income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to the Bank's profit and loss account or received, whichever is earlier. This stipulation is not applicable to provisioning required to be made as indicated above. In other words, amounts set aside for making provision for NPAs as above are not eligible for tax deductions. Therefore, the banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors' tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules." 18. The appellant submitted before us that the Reserve Rank of India had failed to exercise the statutory powers vested in it and therefore, it failed to perform a legal duty cast upon it by law. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntment of auditors. 23. Section 35 relates to inspection of banking companies. It empowers the Reserve Bank to cause an inspection to be made by one or more of its officers of any banking company and its books and account. 24. Section 36 enumerates the other powers and functions of the Reserve Bank. Similarly section 36AA empowers the Reserve Bank to remove from office any Chairman, Director, Chief Executive Officer or other officer or employee of the banking company, subject to the conditions laid down in that provision. 25. Section 45 confers power on the Reserve Bank to apply to the Central Government for suspension of business by a banking company and to prepare scheme of reconstitution or amalgamation. We fail to appreciate how any of these provisions is relevant to the issue that arises in the instant appeal. No doubt the Reserve Bank has been vested with wide powers to control and regulate the functioning of banks. If need be, those powers may be exercised by the Reserve Bank. In the instant case, we are only concerned with the writing off of Non Performing Assets. Nothing has been produced on record to satisfy us that the Reserve Bank has acted in breach of its legal obl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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