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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 ..... ority in excluding the balances in Share premium account, Profit Loss Account and special Reserve account while computing the general reserves. Nothing on record would suggest any change in facts or as to how the said ruling is not applicable to the facts of the case. Addition u/s 36(1)(viii) - year of assessment - HELD THAT:- The assessee could transfer / withdraw amounts to / from special reserve, from time to time, as per its own decision convenience. The limit placed by proviso to Section 36(1)(viii) was to be seen with reference to indices standing in assessee s financial statements at year-end and the disallowance was to be worked out as per the proviso to Section 36(1)(viii) for each year separately. During the year, the assessee could transfer / withdraw any amounts from / to special reserve. Therefore, there is no force in the argument of double taxation as urged by Ld. AR before us. In our opinion, the disallowance was to be worked out for each year separately keeping in view the closing balances standing in relevant accounts in the financial statements. This ground is decided against the assessee. Computations u/s 43D read with Rule 6EB - whether in the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have come up for fresh hearing before the bench. ITA No. 5434/Mum/2011, AY 2004-05 2.1 As evident from Tribunal s order in MA No. 248/Mum/2011, the only point of determination for this AY is whether balance in Profit Loss Account , which is not in the nature of any other reserve having specific objectives, should form part of general reserves or not for the purpose of proviso to Section 36(1)(viii) as it stood at 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, the same would include balance standing in the Profit Loss Account also. It has further been submitted that the expression reserves has not been defined under the Income Tax Act, 1961. Our attention has been drawn to letter issued by Department of Company Affairs (department letter No. 3/1/80-CL-X dated 16/02/1982) wherein it has been clarified that surplus appearing in the Balance Sheet of the company is a part of free reserve as defined under the Company s (Acceptance of deposits) Rules, 1975. It has further been pleaded that the term free reserves is used inter-changeably with the expression General Reserve. In the above background, Ld. AR pleaded for inclusion of balance standing in the Profit Loss Account as part of General Reserves for the purpose of computation under proviso to Section 36(1)(viii). Per Contra, Ld. CIT-DR, submitted that Reserves is an appropriation out of Profit Loss Account and quite distinct from the expression General Reserves and therefore, the same would not be includible for the purpose of computation. It has been submitted that the issue stood squarely covered in assessee s favor by the decision of Bangalore Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 5435/Mum/2011, AY 2005-06 3.1 From the perusal of MA No. 249/Mum/2016, it transpires that certain ground has remained to be adjudicated in the order. These grounds are Ground Nos. 2(c) (d) and Ground No.4. These grounds read as under: - 2. Without prejudice to ground 1, the learned CIT(A) erred in confirming the order passed by the AO restricting the deduction u/s 36(1)(viii) to ₹ 29 Crores as against the claim made by the assessee at ₹ 101 Crores. Among other, Id. CIT(A) erred in: - .. (c) not accepting the appellants submission that all the items classified in the appellants balance sheet under the head reserves and surplus excepting special reserve created in terms of 36(1)(viii) should be considered as general reserves . He ought to have appreciated that there is no definition of general reserves 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. (d) Without prejudice disallowance of ₹ 71.65 Crores confirmed by Ld. CIT(A) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the excess amount would not bear the character of special reserve for the purpose of Section 36(1)(viii). In the above background, it was submitted that excess amount i.e. ₹ 20.47 Crores as carried to special reserve during 31/03/2004 should not be treated as special reserve in AY 2005-06 but treated as a part of general reserves only for the purpose of proviso to Section 36(1)(viii). 3.4 Upon careful consideration, we are not convinced with assertions made by Ld. AR since the creation and maintenance of special reserve was the decision of the assessee. The assessee could transfer / withdraw amounts to / from special reserve, from time to time, as per its own decision convenience. The limit placed by proviso to Section 36(1)(viii) was to be seen with reference to indices standing in assessee s financial statements at year-end and the disallowance was to be worked out as per the proviso to Section 36(1)(viii) for each year separately. During the year, the assessee could transfer / withdraw any amounts from / to special reserve. Therefore, there is no force in the argument of double taxation as urged by Ld. AR before us. In our opinion, the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 43D could not be read in contradiction to norms prescribed by NHB as amended from time to time. However, not convinced Ld. CIT(A) opined that NHB guidelines could not override the provisions of the act and therefore, upheld the stand of Ld. AO. Aggrieved, the assessee is under appeal before us. Both the representatives have advanced arguments, which we have duly considered. We have also deliberated on the judicial pronouncements cited before us in support of the submissions. 4.3 At the outset, the substantive provisions as contained in Section 43D read as under: - 43D. Notwithstanding anything to the contrary contained in any other provision of this Act,- (a) in the case of a public financial institution or a scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts; (b) in the case of a public company, the income by way of interest in relation to such categorie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of this rule, an amount shall be deemed to be past due when it remains unpaid for thirty days beyond the due date. It is evident that Rule 6EB provide for two categories of doubtful debts (a) doubtful asset which has remained non-performing asset (NPA) for a period exceeding 2 years; and (b) loss asset which is identified as uncollectable. The prescribed period of default to treat term loan / lease rental / bills / any other credit facilities as NPA, is uniform period of 6 months. However, this period of 6 months, as per revised NHB guidelines as applicable from 31/03/2005 is 90 days which has created the controversy. The assessee following NHB guidelines has not recognized income on those assets which remained NPA beyond 90 days. 4.4 Upon due consideration, we find that the provisions of Rule 6EB were initially in tandem with NHB guidelines. However, with effect from 31/03/2005, there was a change in NHB guidelines which now prescribed that if a debt is overdue for a period of 90 days then income by way of interest shall be recognized only on receipt basis unless the assessee recognizes the same in its books of account. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... institution or the scheduled bank or the State Finance Corporation or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. 15. The Legislature having laid down the broad principles of its policy in section 43D(b) of the Act, has left the details to be supplied by the rule making authority. What is delegated to the rule making authority is the power to determine, the debts which can be considered as bad and doubtful, interest income on which can be considered as not having accrued, to an assessee following mercantile system of accounting. In doing so, the rule making authority has been directed to have regard to the guidelines issued by the NHB in relation to such debts. Section 43D of the Act, does not mandate the rule making authority to follow the guidelines issued by the NHB in relation to bad and doubtful debts. In exercise of such power the rule making authority has enacted Rule 6EB of the Rules. The rule so enacted originally was in conformity with the guidelines issued by NHB. The guidelines were revised by NHB in the year 2004 but the rule making authority did not think ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 43D can it be said that no income accrued to the assessee and can it be said that by applying the real income theory the interest income in question cannot be brought to tax. In this regard at the outset we have to bear in mind that accrual under the mercantile system of accounting depends on the legal right to receive and the inability of the debtor to make payment will have no effect on the legal right of the creditor to receive. In State Bank of Travancore (supra), the Hon'ble Supreme Court had to deal with accrual of income in the context of interest on bad or doubtful debts in the case of Banks. The facts were that the assessee which was a subsidiary of the State Bank of India maintained accounts on mercantile system making entries on accrual basis. It adopted the calendar year as its previous year and the calendar years 1964, 1965 and 1966 for which assessment years 1965-66, 1966-67 and 1967-68 were the relevant A.Y. In the course of its banking business, the assessee charged interest on advances considered doubtful of recovery, otherwise called sticky advances, by debiting the concerned parties but instead of carrying it to its profit and loss account credited the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumspection and must not be called in aid to defeat the fundamental principles of the law of income-tax as developed. 18. The Hon'ble Supreme Court in its later judgment in the case of UCO Bank (supra) however did not agree with the aforesaid view because one of the Circular of CBDT had been overlooked while rendering the aforesaid decision. The question before the Hon'ble Court was as to whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account and has not been brought to the profit and loss account of the assessee, can be included in the income of the assessee for the assessment year 1981-82. The Central Board of Direct Taxes had issued Circular No. 41 (V-6) D of 1952, dated October 6, 1952. The circular, inter alia, stated that interest accruing to a money-lender on loans entered in the suspense account because of the extreme unlikelihood of their being recovered need not be included in the assessee's taxable income if the Income-tax Officer is satisfied that there is really little probability of the loans being repaid. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner ; or (b) so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions . Under sub-section (2) of section 119, without prejudice to the generality of the Board's power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases, setting forth directions or instructions, not being prejudicial to assessees, as to the guidelines, principles or procedures to be followed in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered. 19. On the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore (supra), the Court held as follows : The first decision is the majority judgment in State Bank of Travancore v. CIT [1986] 158 ITR 102, decided by a Bench of three judges of this court by a majority of two to one. This judgment directly deals with interest on sticky advances which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on sticky advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K.K. Sen [1965] 56 ITR 198 (SC). 20. We agree with the submissions of the learned D.R. that the decision of the Hon'ble Supreme Court in the case of UCO Bank (supra) does not obliterate the ratio of the very same Hon'ble Court in the case of State Bank of Travancore (supra) but onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 Supreme Court in the case of Southern Technologies Ltd. (supra) would apply. The Hon'ble Delhi High Court was dealing with a case where there was a conflict between theory of income recognition and prudential norms of the RBI. In the present case, we are concerned with the provisions of section 43D vis-a-vis the guidelines of NHB regarding bad and doubtful debts. The Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) had to deal with deduction on account of claim for deduction on account of provision for Non-Performing Assets in terms of RBI directions issued under the RBI Act, 1934. The Hon'ble Court found that under Explanation to section 36(1)(vii) of the Act, provision for doubtful debt was kept out of the ambit of bad debt written off. It was further held that under the Act, tax is on real income i.e., profits arrived at on commercial principles subject to the provisions of the Act. Real profits can be arrived at only by making the permissible deductions. Since the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 before us. This decision has been followed by Chennai Tribunal in The Karur Vysya Bank Ltd. (ITA Nos. 2325-36/Mds.2016 29/03/2017) . Similar is the position of other decisions cited by Ld. AR, before us. Therefore, no guidance could be obtained from all these decisions to resolve the controversy before us. 4.8 During the course of hearing, a decision of Hon ble Delhi High Court rendered in Housing Urban Development Corporation Ltd. V/s Addl. CIT (83 Taxmann.com 292 dated 03/07/2017), which is directly on the point favoring revenue, was brought to the notice of the bench. However, it is found that the operation of the said order has subsequently been stayed by Hon ble Apex Court in Special Leave Petition (Civil) Diary No. 24914/2-18 dated 06/08/2018 by observing as under: - Delay condoned Issue notice. There shall be stay of operation of the order passed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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