Madras High Court
M/S. Sakthi Finance Limited vs The Assistant Commissioner Of ... on 7 December, 2021
TCA Nos. 373, 374, 375 and 376 of 2011
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Dated : 07.12.2021
CORAM :
THE HONOURABLE MR. JUSTICE R. MAHADEVAN
and
THE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ
Tax Case Appeal Nos. 373, 374, 375 and 376 of 2011
---
M/s. Sakthi Finance Limited
475, Dr. Nanjappa Road .. Appellant in all
Coimbatore - 641 018 the Appeals
Versus
The Assistant Commissioner of Income Tax
Company Circle I (1) .. Respondent in all
Coimbatore the appeals
TCA No. 373 of 2011:- Appeal filed under Section 260-A of The
Income Tax Act, 1961 against the order dated 07.07.2006 passed in
Int.A.No.15/Mds/2005 on the file of Income Tax Appellate Tribunal, Madras
"D" Bench.
TCA No. 374 of 2011:- Appeal filed under Section 260-A of The
Income Tax Act, 1961 against the order dated 07.07.2006 passed in
Int.A.No.16/Mds/2005 on the file of Income Tax Appellate Tribunal, Madras
"D" Bench.
TCA No. 375 of 2011:- Appeal filed under Section 260-A of The
Income Tax Act, 1961 against the order dated 07.07.2006 passed in
Int.A.No.17/Mds/2005 on the file of Income Tax Appellate Tribunal, Madras
"D" Bench.
TCA No. 376 of 2011:- Appeal filed under Section 260-A of The
Income Tax Act, 1961 against the order dated 07.07.2006 passed in
Int.A.No.18/Mds/2005 on the file of Income Tax Appellate Tribunal, Madras
"D" Bench.
https://www.mhc.tn.gov.in/judis
TCA Nos. 373, 374, 375 and 376 of 2011
For Appellant : Mr. R. Vijayaraghavan
in all the Appeals
For Respondent : Mr. M. Swaminathan, Senior Standing Counsel
for Mrs. K.G.Usha Rani, Junior Standing Counsel
in all the Appeals
COMMON JUDGMENT
(Judgment of the Court was delivered by R. Mahadevan, J)
These tax case appeals have been filed by the appellant/assessee, calling
in question the correctness of the orders dated 07.07.2006 passed by the
Income Tax Appellate Tribunal, Madras "D" Bench. in (i)
Int.A.No.15/Mds/2005 (ii) Int.A.No.16/Mds/2005 (iii) Int.A.No.17/Mds/2005
and (iv) Int.A.No.18/Mds/2005 relating to the assessment years 1995-1996,
1996-1997, 1997-1998 and 1998-1999 respectively. On 08.11.2011, these
appeals were admitted on the following substantial questions of law:-
"1. Whether on the facts and in the circumstances of the
case, the Tribunal was right in holding that the interest income
on Non-performing Asset (Sticky loans) should be assessed to
tax on accrual basis, when the principal amount is doubtful of
recovery."
2. Whether on the facts and in the circumstances of the
case, the Tribunal ought to have appreciated that the income was
not accounted on account of uncertainity of realisation and held
that income does not accrue even under mercantile system of
accounting?
3. Whether on the facts and in the circumstances of the
case, the Tribunal ought to have appreciated that RBI guidelines
are also in line with the method of determining the real income
of an assessee and it is in accordance with the ratio of the
https://www.mhc.tn.gov.in/judis
TCA Nos. 373, 374, 375 and 376 of 2011
decision of the Apex Court in Godhra Electricity Supply Co., vs.
C.I.T. (225 ITR 746) and the Accounting Standard issued by the
CBDT and hence the non recognition of income in line with the
RBI guideline cannot be brought to tax?
2. When these appeals are taken up for consideration today, the
learned counsel for the respondent/Revenue brought to the notice of this court
the Circular No.17/2019 dated 08.08.2019 issued by the Central Board of
Direct Taxes, wherein, it is stipulated that appeals shall not be filed/pursued by
the Department before the High Court in cases where the tax effect does not
exceed Rs.1,00,00,000/- (Rupees One Crore). It is also submitted that the tax
effect in these appeals is less than the threshold limit.
3. Notwithstanding the above, one of the issues involved in these
appeals namely "whether interest on Non-performing Asset was not to be
included in the total income of the assessee on accrual basis, even though the
assessee was following Mercantile System of accounting is valid" is covered
by the decision of the Division Bench of the Delhi High Court in the case of
Commissioner of Income Tax vs. Vasisth Chay Vyapar Limited reported in
(2011) 330 ITR 044, which was subsequently confirmed by the Honourable
Supreme court in the order dated 13.12.2017 passed in Civil Appeal No. 5811
of 2012 etc., batch. The decision of the Division Bench of the Delhi High
Court can profitably be extracted hereunder:-
https://www.mhc.tn.gov.in/judis
TCA Nos. 373, 374, 375 and 376 of 2011
"17. 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, eligible 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.
https://www.mhc.tn.gov.in/judis
TCA Nos. 373, 374, 375 and 376 of 2011
18. As noted above, Mr. Sabharwal, argued that the case of
the assessee was to be dealt with for the purpose of taxability as
per the provisions of the Act and not the RBI Act which was the
accounting method that the assessee was supposed to follow. We
have already held that even under the Income Tax Act, interest
income had not accrued. Moreover, this submission of Mr.
Sabharwal is based entirely on the judgment of the Supreme Court
in the case of Southern Technology (supra). No doubt, in first
blush, reading of the judgment gives an indication that the Court
has held that RBI Act does not override the provisions of the
Income Tax Act. However, when we examine the issue involved
therein minutely and deeply in the context in which that had
arisen and certain observations of the Apex Court contained in
that very judgment, we find that the proposition advanced by Mr.
Sabharwal may not be entirely correct. In the case before the
Supreme Court, the assessee a NBFC debited Rs.81,68,516 as
provision against NPA in the profit and loss account, which was
claimed as deduction in terms of Section 36 (1) (vii) of the Act.
The assessing officer did not allow the deduction claimed as
aforesaid on the ground that the provision of NPA was not in the
nature of expenditure or loss but more in the nature of a reserve,
and thus not deductible under Sectrion 36 (i) (vii) of the Act. The
assessing officer, however, did not bring to tax Rs.20,34,605 as
income (being income accrued under the mercantile system of
accounting). The dispute before the Apex court centered around
deductibility of provision for NPA. After analyzing the provisions
of the RBI Act, their Lordships of the Apex Court observed that
in so far as the permissible deductions or exclusions under the Act
are concerned, the same are admissible only if such
deductions/exclusions satisfy the relevant conditions stipulated
therefor under the Act. To that extent, it was observed that the
Prudential Norms do not override the provisions of the Act.
However, the Apex Court made a distinction with regard to
"Income Recognition" and held that income had to be recognized
in terms of the Prudential Norms, even though the same deviated
from mercantile system of accounting and/or Section 45 of the
Income Tax Act. It can be said, therefore, that the Apex Court
approved the 'real income" theory which is engrained in the
Prudential Norms for recognition of revenue by NBFC. The
following passage from the judgment of the Apex Court would
https://www.mhc.tn.gov.in/judis
TCA Nos. 373, 374, 375 and 376 of 2011
bring out the distinction noticed by the Apex Court between
permissible deductions/exclusions, on the one hand, and income
recognition on the other:-
........
40. At the outset, we may state that in essence RBI
Directions 1998 are Prudential/Provisioning Norms issued
by RBI under Chapter IIIB of the RBI Act, 1934. These
Norms deal essentially with Income Recognition. They
force the NBFCs to disclose the amount of NPA in their
financial accounts. They force the NBFCs to reflect "true
and correct" profits. By virtue of Section 45Q, an
overriding effect is given to the Directions 1998 vis-a-vis
"income recognition" principles in the Companies Act,
1956. These Directions constitute a code by itself.
However, these Directions 1998 and the IT Act operate in
different areas. These Directions 1998 have nothing to do
with computation of taxable income. These Directions
cannot overrule the "permissible deductions" or "their
exclusion" under the IT Act. The inconsistency between
these Directions and Companies Act is only in the matter of
Income Recognition and presentation of Financial
Statements. The Accounting Policies adopted by an NBFC
cannot determine the taxable income. It is well settled that
the Accounting Policies followed by a company can be
changed unless the AO comes to the conclusion that such
change would result in understatement of profits. However,
here is the case where the AO has to follow the RBI
Directions 1998 in view of Section 45Q of the RBI Act.
Hence, as far as Income Recognition is concerned, Section
145 of the IT Act has no role to play in the present
dispute."
19. We have also noticed the other line of cases wherein the
Supreme Court itself has held that when there is a provision in
other enactment which contains a non-obstante clause, that would
override the provisions of Income Tax Act. TRO Vs. Custodian,
Special Court Act (supra) is one such case apart from other cases
of different High Courts. When the judgment of the Supreme
Court in Southern Technology (supra) is read in manner we have
https://www.mhc.tn.gov.in/judis
TCA Nos. 373, 374, 375 and 376 of 2011
read, it becomes easy to reconcile the ratio of Southern
Technology with TRO Vs. Custodian, Special Court Act.
20. Thus viewed from any angle, the decision of the
Tribunal appears to be correct in law. The question of law is thus
decided against the Revenue and in favour of the assessee. As a
result, all these appeals are dismissed."
4. In the light of the above, the questions of law raised in these
appeals are answered in favour of the assessee and against the revenue and
accordingly, the present appeals are disposed of. No costs.
(R.M.D.J.,) (M.S.Q.J.,)
07.12.2021
Index : Yes/No
Internet : Yes/No
rsh
https://www.mhc.tn.gov.in/judis
TCA Nos. 373, 374, 375 and 376 of 2011
R. MAHADEVAN, J
and
MOHAMMED SHAFFIQ, J
rsh
and 376 of 2011
07.12.2021
https://www.mhc.tn.gov.in/judis
