Madras High Court
The Commissioner Of Income Tax-I vs M/S. Sakthi Finance Limited on 7 December, 2021
TCA Nos. 334, 335 and 336 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. 334, 335 and 336 of 2011
---
The Commissioner of Income Tax-I .. Appellant in all
Coimbatore the appeals
Versus
M/s. Sakthi Finance Limited
475, Dr. Nanjappa Road .. Respondent in all
Coimbatore - 18 (PAN No.AADCS0656G) the appeals
TCA No. 334 of 2011:- Appeal filed under Section 260-A of The
Income Tax Act, 1961 against the order dated 16.12.2010 passed in I.T.A.
No.1646/Mds/2010 on the file of Income Tax Appellate Tribunal, "B" Bench,
Chennai.
TCA No. 335 of 2011:- Appeal filed under Section 260-A of The
Income Tax Act, 1961 against the order dated 16.12.2010 passed in I.T.A.
No.1647/Mds/2010 on the file of Income Tax Appellate Tribunal, "B" Bench,
Chennai.
TCA No. 336 of 2011:- Appeal filed under Section 260-A of The
Income Tax Act, 1961 against the order dated 16.12.2010 passed in I.T.A.
No.1648/Mds/2010 on the file of Income Tax Appellate Tribunal, "B" Bench,
Chennai.
For Appellant : Mr. M. Swaminathan, Senior Standing Counsel
for Mrs. K.G.Usha Rani, Junior Standing Counsel
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in all the Appeals
TCA Nos. 334, 335 and 336 of 2011
For Respondent : Mr. R. Vijayaraghavan
for Mr. Subburaya Aiyar
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/Revenue, calling
in question the correctness of the orders dated 16.12.2010 passed by the
Income Tax Appellate Tribunal, "B" Bench, Chennai in (i) I.T.A.
No.1646/Mds/2010 (ii) I.T.A. No.1647/Mds/2010 and (iii) I.T.A. No.1648
/Mds/2010 relating to the assessment years 2003-2004, 2004-2005 and 2007-
2008 respectively. On 02.11.2011, these appeals are admitted on the following
substantial question of law:-
"Whether on the facts and in the circumstances of the case,
the Income Tax Appellate Tribunal was right in law in holding
that Finance charges 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."
2. When these appeals are taken up for consideration today, the
learned counsel for the appellant/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
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TCA Nos. 334, 335 and 336 of 2011
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, the issue 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:-
"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
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TCA Nos. 334, 335 and 336 of 2011
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.
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
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TCA Nos. 334, 335 and 336 of 2011
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 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
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TCA Nos. 334, 335 and 336 of 2011
"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
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 question of law raised in these
appeals is answered in favour of the assessee and against the revenue and
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TCA Nos. 334, 335 and 336 of 2011
hence, the present Tax Case Appeals are dismissed. 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. 334, 335 and 336 of 2011
R. MAHADEVAN, J
and
MOHAMMED SHAFFIQ, J
rsh
TCA Nos. 334 to 336/2011
07.12.2021
https://www.mhc.tn.gov.in/judis
