Delhi High Court
Director Of Income Tax vs Brahamputra Capital Financial ... on 18 May, 2011
Author: A.K.Sikri
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA NO. 02 OF 2009
ITA NO.170 OF 2009
ITA NO. 317 OF 2010
ITA NO.1576 OF 2010
JUDGMENT DELIVERED ON: MAY 18,2011
%
(1)ITA NO. 02 OF 2009
DIRECTOR OF INCOME TAX . . . APPELLANT
Through : Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Deepak
Anand, Jr. Standing
Counsel
VERSUS
BRAHAMPUTRA CAPITAL FINANCIAL ... RESPONDENT
SERVICES LTD.
Through: Mr. Ajay Vohra, Advocate
with Ms. Kavita Jha and
Somnath Shukla,
Advocates.
(2) ITA NO.170 OF 2009
DIRECTOR OF INCOME TAX . . . APPELLANT
Through : Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Deepak
Anand, Jr. Standing
Counsel
VERSUS
BRAHAMPUTRA CAPITAL FINANCIAL ... RESPONDENT
SERVICES LTD.
Through: Mr. Ajay Vohra, Advocate
with Ms. Kavita Jha and
Somnath Shukla,
Advocates.
ITA NO. 02/2009,170/2009,317/2010,1576/2010. Page 1 of 11
(3) ITA NO. 317 OF 2010
DIRECTOR OF INCOME TAX . . . APPELLANT
Through : Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Deepak
Anand, Jr. Standing
Counsel
VERSUS
BRAHAMPUTRA CAPITAL FINANCIAL ... RESPONDENT
SERVICES LTD.
Through: Mr. Ajay Vohra, Advocate
with Ms. Kavita Jha and
Somnath Shukla,
Advocates.
(4) ITA NO.1576 OF 2010
DIRECTOR OF INCOME TAX . . . APPELLANT
Through : Ms. Prem Lata Bansal, Sr.
Advocate with Mr. Deepak
Anand, Jr. Standing
Counsel
VERSUS
BRAHAMPUTRA CAPITAL FINANCIAL ... RESPONDENT
SERVICES LTD.
Through: Mr. Ajay Vohra, Advocate
with Ms. Kavita Jha and
Somnath Shukla,
Advocates.
CORAM :-
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA
1. Whether Reporters of Local newspapers may be
allowed to see the Judgment?
2. To be referred to the Reporter or not?
ITA NO. 02/2009,170/2009,317/2010,1576/2010. Page 2 of 11
3. Whether the Judgment should be reported in the
Digest?
A.K. SIKRI, J. (ORAL)
1. In all these appeals, common questions of law are proposed
which relate to different assessment years pertaining to the same
assessee. The assessee herein is a Non Banking Financial
Company (NBFC) which had given loan of `13,57,87,057/- to few
companies, stated to be the group concerns of the assessee. This
was interest bearing loan. However, in the assessment years in
question, the assessee had not shown the interest in its profit and
loss account on the ground that said loan had become Non
Performing Asset (NPA) in terms of the guidelines issued by the
Reserve Bank of India and, therefore, it was unlikely to receive the
interest thereupon and thus interest had not accrued to the
assessee in the relevant assessment years. The Assessing Officer,
however, was of the opinion that since the assessee was following
mercantile system of accounting, even if the interest was not
actually received by the assessee on the aforesaid loan, it had
accrued to the assessee in the relevant assessment years and was
to be treated as income of the assessee within the meaning of
Section 5 of the Income Tax Act (hereinafter referred to as „the
Act‟) and made additions. This view of the AO was upheld by the
CIT (A) but has been reversed by the ITAT vide its impugned
orders. The Revenue preferred appeal against the impugned order
proposing various questions of law in these appeals but the
following question of law proposed by the Revenue would cover all
the aspects:-
"Whether ITAT was correct in law in deleting
the addition of ` 2,15,53,466/- made by the
Assessing Officer on account of interest
accrued to the assessee as per mercantile
system of accounting?"
2. The facts which are necessary to determine as to whether
the aforesaid question of law as proposed is a substantial question
of law arising for consideration or not, may now be noted.
3. The assessee had given interest bearing loans to following
parties, which is reflected in the balance sheet for the period
ending 31st March, 2003.
1. Jindal Equipment Leasing ` 7,32,72,000
& Consultancy Services Ltd.
2. Mansarovar Investment Ltd. ` 5,10,17,630
3. Goswamis Credits & Investment Ltd. ` 1,14,97,427/-
..........................
` 13,57,87,057
.........................
Further it was contended in the notes attached with the
return that certain loans given by the company have become Non-
Performing Asset (NPA) and as per NBFC Prudential Norms (RBI),
Directions, 1998, interest income on NPA shall be recognized only
when it is as actually realized. It has been further stated that
accordingly, interest income on loans given which has become
NPA has not been accounted for and same shall be offered for
taxation as and when received. Since the assessee had given
above mentioned loans on interest and it was following mercantile
system of accounting, as per Assessing Officer, it was required to
declare interest income on the above loan on accrual basis only
irrespective of date of actual receipt of interest and this accrued
interest for the year under consideration should have been
declared by it as its income earned from interest in this year,
which it has not done. Accordingly, it was asked to give details of
NPAs (including details of deposits, when given, rate on which the
said loans were given and interest accrued) on which interest
income was not declared. It was also asked to file copies of loan
agreements and to explain and show cause as to why the accrued
interest on such loan should not be taken as its income for the
year under concern as it was maintaining its accounts on
mercantile/accrual basis. It was also asked to prove with
evidences that these loans have actually become NPA. In
response, details of loan outstanding as on 31st March, 2003
alongwith copies of agreements regarding loans indicating rates of
interest thereupon have been filed. It has also been stated that
loans to Jindal Equipment Leasing and Consultancy Services Ltd.
and Mansarovar Investment Ltd. were advanced in the F.Y. 96-97
and the assessee accrued interest on the loan till the F.Y. 97-98.
As the amount of interest for F.Y. 97-98 remained outstanding for
more than six months, the advances became NPA as per the
definition of NBFC‟s Prudential Norms (RBI) Directions 1993. As
regards loans given to Goswamis Credits & Investment Ltd. it was
stated that loan was given in the F.Y. 1998-99 and the assessee
accrued interest on this loan till F.Y. 2000-01 and since, the
interest for F.Y. 2000-01 remained outstanding for more than six
months, the advances became NPA as per the definition of NBFC‟s
Prudential Norms (RBI) Direction 1998. It has further stated that it
is a NBFC and has been granted certificate of registration by the
RBI under Section 45-IA of the RBI Act 1394 and therefore, it is
bound to follow the directions/instructions/guidelines issued by the
RBI from time to time including NBFC‟s Prudential Norms (RBI)
Directions 1998 and in terms of said directions/norms, advances
on which interest remained outstanding for more than six months
were required to be treated as NPA, as defined in para 2 (xii) of
RBI Act. It has been further stated that as per para 3 of the said
Act, interest/discount or any other charges, on NPA shall be
recognized only when it is actually realized. It has further stated
that non recognition of interest income on loan/advances is in
accordance with the aforesaid norm and direction issued by the
RBI and since, it is bound by the aforesaid directions, it did not
recognize interest income on the advances which has been
classified as a NPA in accordance with the said norms. It has
further cited Section 45 Q (Chapter III B) of the RBI Act to
emphasize that provisions of this chapter will have overriding
effect on any other law and thus interpreted it as having
overriding effect on I.T. Act also. It has also cited Section 45JA of
RBI Act to state that the RBI has been empowered to determine
policy and issue directions from time to time to all or any of the
NBFCs relating to income recognition and accounting standards
etc. and on the basis of it, stated that a NBFC is bound to follow
the policy determined by the RBI, which has issued NBFC‟s
Prudential Norms (RBI) Direction 1998, according to which interest
or any other charges on NPA shall be recognized only when it is
actually realized.
4. It is clear from the above that the submission of the
assessee before the authorities below that that since the
recoverability of principle amount of loan itself was doubtful,
decision was taken as a prudent businessman and interest income
was not accounted for in the books of account. As per the
assessee, under these circumstances, there was no real accrual of
interest and interest was not taxable in the hands of the assessee
having regard to the principles of real income. It was also
submitted before the lower authorities that even in accordance
with the accounting standard AS-9, issued by the Institute of
Chartered Accountants of India dealing with the effect of
uncertainty on revenue recognition, the guidance note on Accrual
Basis of Accounting issued by ICAI according to which where
ultimate collection with reasonable certainty is lacking, the
revenue recognition is to be postponed to extent of uncertainty
involved. For this purpose, reliance was placed upon the RBI
Directive; accounting standard issued by ICAI (AS-9) and the
guidelines of the RBI including NBFC Prudential Loan (RBI)
Directions, 1998. The Tribunal has accepted the aforesaid
contentions of the assessee holding that there was no accrual of
real income and, therefore, it did not become income in the hands
of the assessee under Section 5 of the Act. The Tribunal has also
held that merely because the assessee and the borrower were
known to each other would not be sufficient to render the financial
position of borrower company better so as to increase the
likelihood of interest payment to the assessee company.
5. Identical issue came up before this Court in batch of appeals
leading case being Commissioner of Income Tax Vs. M/s
Vasisth Chay Vypapar Ltd. ( ITA 552/2005 decided on
29.11.2010.), this theory of "real income" was discussed in detail.
That was also a case of NBFC where loan/advance given by the
said assessee had become NPA and keeping in view the guidelines
of RBI interest was not treated as accrued. After taking note of
various judgments on the subject, the question was answered in
favour of the assessee and against the Revenue. The legal
position is summarized in para 17 of the said judgment which
reads as under:-
"In this scenario, we have to examine the
strength in the submission of learned counsel
for the Revenue that whether it can still be
held that income in the form of interest
though not received had still accrued to the
assessee under the provisions of Income Tax
Act and was, therefore, exigible to tax. Our
answer is in the negative and we give the
following reasons in support:-
(1) First of all we would discuss
the matter in the light of the
provisions of Income Tax Act and to
examine as to whether in the given
circumstances, interest income has
accrued to the assessee. It is stated
at the cost of repetition that admitted
position is that the assessee had not
received any interest on the said ICD
placed with Shaw Wallce since the
assessment year 1996-97 as it had
become NPAs in accordance with the
Prudential norms which was entered
in the books of accounts as well. The
assessee has further successfully
demonstrated that even in the
succeeding assessment years, no
interest was received and the position
remained the same until the
assessment years 2006-07. Reason
was adverse financial circumstances
and the financial crunch faced by
Shaw Wallace. So much so, it was
facing winding up petitions which
were filed by many creditors. These
circumstances, led to an uncertainty
in so far as recovery of interest was
concerned, as a result of the aforesaid
precarious financial position of Shaw
Wallace. What to talk of interest,
even the principal amount itself had
become doubtful to recover. In this
scenario it was legitimate move to
infer that interest income thereupon
has not "accrued". We are in
agreement with the submission of Mr.
Vohra on this count, supported by
various decisions of different High
Courts including this court which has
already been referred to above.
(2) In the instant case, the
assessee company being NBFC is
governed by the provisions of RBI Act.
In such a case, interest income cannot
be said to have accrued to the
assessee having regard to the
provisions of section 45Q of the RBI
and Prudential Norms issued by the
RBI in exercise of its statutory powers.
As per these norms, the ICD had
become NPA and on such NPA where
the interest was not received and
possibility of recovery was almost nil,
it could not be treated to have been
accrued in favour of the assessee."
6. The aforesaid judgment clearly applies to the present case
as well. Following that judgment, we are of the view that no
substantial question of law arises in these appeals and are
accordingly dismissed.
(A.K. SIKRI)
JUDGE
(M.L. MEHTA)
JUDGE
MAY 18, 2011
skb
