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TMI Blog2019 (10) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... t the relevant point of time. The corresponding ground of appeal is Ground No. 2(c), which read as under: - Not accepting the Appellant's submission that all the item classified in the Appellant's Balance Sheet under the head 'Reserve & Surplus' excepting Special Reserve created in term of 36(1)(viii) should be considered as "General Reserves". He ought to have appreciated that there is no definition of "General Reserve" in the proviso to Section 36(1)(viii) or anywhere else in the Income Tax Act and that the reference to the expression "General Reserves" in plural is significant. 2.2 The assessee company is stated to be engaged in the business of providing long term housing finance and was eligible for deduction to the extent of 40% of specified profits u/s 36(1)(viii) on creation and maintenance of special reserve. As per proviso to this Section, where the aggregate amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital and of the general reserve, no allowance shall be made for the excess. We are concerned with determination of the point that whether the term General Reserve as used in the proviso would include the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the rival submissions and deliberated on cited decision of the Tribunal. As per the provision of Sec 36(1)(viii), certain specified assessees are eligible to claim deduction to the extent of 40% from profit derived from specified business upon creation of special reserve. As per the proviso, if the amount carried to such special reserve account, from time to time, exceeds twice the amount of the paid-up share capital and of the general reserves, no allowance under this clause shall be made in respect of such excess. The expression used in the proviso is the general reserves. The term general reserves have been used in plural sense and preceded by the words the which would indicate that it carries special meaning and connotes general reserves only to the exclusion of other. In our considered opinion, the reserves are created as an appropriation out of Profit & Loss Account and the terms Profit & Loss Account & General reserves as mentioned in the proviso could not be equated with each other, in the manner, as suggested by Ld. AR by relying upon the letter of Department of Company Affairs. The said circular, in our considered opinion, would have limited applicability in the contex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that the Appellant had consistently followed the accounting policy of accruing interest on NPA on realization which is also in compliance with mandatory NHB guidelines, AS 9 and other applicable accounting standards, provisions of the Companies Act and Income Tax Act. Without prejudice, ld. CIT(A) failed to appreciate that: - (a) Section 43D inserted by finance act 1999 to provide tax incentives for promotion of housing is not a charging section and can be invoked only when income is recognized by the assessee in which case assessee is given relief under section 43D so as to tax the interest income on doubtful debts only when it is realized. (b) Section 43D cannot be read in contradiction to norms prescribed by NHB. (c) after insertion of Section 43D method of accounting followed by the appellant was categorically accepted by the Department in earlier years (d) notional interest on NPA, if taxed in the hands of the assessee, then correspondingly same amount should be allowed deduction as bad debts under section 36(1)(vii). 3.2 Ground No. 2(c) require determination of the expression general reserves which has already been dealt with us by in AY 2004-05. The question b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that Rule 6EB was brought into statute by Income Tax (Thirtieth Amendment) Rules, 1999 with effect from 06/10/1999 and the same remained unchanged since then. Nevertheless, the prescription under the said rule was guided by the National Housing Bank (NHB) guidelines referred to in Section 43D(b) of the Act. However, NHB guidelines were superseded by Housing Finance Companies (NHB) directions, 2001 notified on 29/12/2001. These directions were issued in exercise of the powers conferred on NHB by the statutory provisions contained in Section 30, 30A, 31 & 33 of the NHB Act, 1987. The NHB directions as amended as on 31/03/2005, differed from the erstwhile NHB directions in respect of definition of doubtful debts, Non-performing assets, Income recognition criteria etc. Despite the changes made by NHB directions, 2001, no corresponding change was perceived to have taken place in Rule 6EB. It was contended that since the substantive provisions of Section 43D delegating authority to prescribe the relevant rules for recognition of interest income was to be computed having regards to the guidelines issued by the NHB, the NHB directions must be accorded primacy and NHB guidelines would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income by way of interest on certain prescribed categories of doubtful debts shall be chargeable to tax in the year in which it is credited or actually received, whichever is earlier. The categories of debts, as prescribed in Rule 6EB are as follows: - "Rule 6EB - Categories of bad or doubtful debts in the case of a public company under clause (b) of section 43D. The provisions of clause (b) of Section 43D shall apply in the case of every public company where its income by way of interest pertains to the following categories of bad and doubtful debts, namely, - (a) (i) doubtful asset, that is, a debt which has remained a non- performing asset of the nature specified in sub clause (ii) for a period exceeding two years; (ii) non-performing asset referred to in sub clause (i) shall be the following: - (1) term loan beyond one year, if the interest amount remain "past due" for six months or instalment is overdue for more than six months; (2) lease rental or hire purchase instalment, if the rental or the instalment is "past due" for six months; (3) bill purchased or discounted, if the bill remains overdue and unpaid for six months; or (4) any other credit facility in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rule making authority to follow or not follow the NHB guidelines as and when they were revised since the substantive provisions uses the expression having regard to which would show the intention of legislature was to leave the discretion to the rule making authority. The said interpretation is in line with the decision of Hon'ble Supreme Court in Rajesh Kumar V/s DCIT 287ITR 91 interpreting the expression "having regard to". 4.6 Having said so, we find that identical question came up for consideration before this Tribunal in GIC Housing Finance Ltd. V/s ADIT 45 SOT 318, wherein the bench, after considering the decision of Hon'ble Delhi High Court rendered in CIT V/s Vasisth Chay Vyapar Ltd. (2011 330 ITR 440) which Ld. AR has heavily relied upon, held as under:- 14. We have considered the rival submissions. The provisions of section 43D are as follows: "43D. Special Provisions in case of income of Public Financial Institutions, Public companies etc. Notwithstanding anything to the contrary contained in any other provision of this Act,- (a) ** ** ** (b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as part of section 43D of the Act. We cannot also agree that the expression "Having regard to" used in section 43D of the Act, means that the rule making authority should amend the rules as and when the guidelines of NHB are revised or that we have to read the guidelines of NHB as part of section 43D of the Act. 16. We have also considered the decisions relied upon by the learned counsel for the assessee. In the case of Delhi Farming & Construction (P.) Ltd. (supra) and Rajesh Kumar (supra) , the expression "having regard to" was considered to have a broader meaning because of the discretion inherently necessary in discharge of the power. In fact the decisions seem to suggest that the rule making authority in the present case, need not be bound by the guidelines of NHB and can take into other considerations while prescribing, what are the criteria for determining what are bad and doubtful debts for the purpose of section 43D of the Act. The decision in the case of Bombay State Transport Corporation (supra) is a case where there was conflict between the rules and the Act and as rightly submitted by the learned D.R. that decision is not of any assistance to the plea of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry-but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits. We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x in the fourth year and onwards. However, if there is any recovery in the fourth year or later the actual amount recovered only will be subjected to tax in the respective years. This procedure was to apply to the assessment year 1979-80 and onwards. The Board's Instruction No. 1186, dated June 20, 1978, was modified to this extent". The same circular further clarified that up to the assessment year 1978-79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board's earlier circular dated October 6, 1952, as the said circular was withdrawn only in June, 1978. The new procedure under the circular of October 9, 1984, will be applicable for and from the assessment year 1979-80. The Hon'ble Supreme Court held as follows: "Section 119(1) of the Income-tax Act, 1961, provides that, "the Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. The circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese v. ITO [1981] 131 ITR 597 (SC), also do not appear to have been pointed out to the court. Since the later circular of October 9, 1984, was not pointed out to the court, the court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under section 119 of the Income-tax Act were not placed before the court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In compliance with the Directions issued by the RBI under the RBI Act, 1934, it did not recognise interest on intercorporate deposit as income. The Hon'ble Delhi High Court held that interest income does not accrue and the action of the assessee was correct. To the same effect is the decision of the Hon'ble Madras High Court in the case of Elgi Finance Ltd. (supra). The Hon'ble Delhi High Court considered the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) and explained that the case decided by the Hon'ble Supreme Court involved a case where provision on account of Non- Performing assets was claimed as a deduction, which was held by the Court to be not allowable. The Hon'ble Court found that a deduction claimed under the Act had to satisfy the conditions laid down under the Act and prudential norms of RBI will not override the provisions of the Act. But when it comes to "income recognition" prudential norms will be relevant. As rightly contended by the learned D.R. the issue before the Hon'ble Delhi High Court was not in relation to provisions of section 43D and therefore the ratio laid down by the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. Nothing on record suggest that the aforesaid ruling has subsequently been reversed by any judicial authority or the same is not applicable to the fact the present case. 4.7 Besides the decision of Hon'ble Delhi High Court which has already been considered in the above decision, Ld. AR has also relied upon the decision of Hon'ble Punjab & Haryana High Court in Ludhiana Central Co-op Bank Ltd. (99 Taxmann.com 81), the decision of Hon'ble Bombay High Court in India Debt Management Pvt. Ltd. (ITA No 266 of 2017 dated 15/04/2019) and the decision of Hon'ble Bombay High Court in Solapur District Central Co-op. Bank Ltd. (102 Taxmann.com 440). However, upon careful study of the decisions rendered by Hon'ble Courts, we find that the said decisions do not address the conflict under hand and they are primarily concerned with concept of income recognition vis-à-vis provisioning norms issued by RBI. No such conflict, as in the present case, is found to be present in these decisions. Similarly, the decision of Kolkata Tribunal in DCIT V/s The Royal Bank of Scotland (ITA No. 496/Mum/2015 14/10/2016) has been rendered in the context of Rule 6EA and do not address the conflict ..... X X X X Extracts X X X X X X X X Extracts X X X X
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