Madras High Court
Commissioner Of Income Tax-I vs M/S. Indbank Merchant Banking ... on 25 April, 2022
TCA No. 955 of 2009
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Dated : 25.04.2022
CORAM :
THE HON'BLE MR. JUSTICE R. MAHADEVAN
and
THE HON'BLE MR. JUSTICE J. SATHYA NARAYANA PRASAD
Tax Case Appeal No. 955 of 2009
---
Commissioner of Income Tax-I
Chennai .. Appellant
Versus
M/s. Indbank Merchant Banking Services Ltd.,
3rd Floor, Krest Building
2, Jahangir Street
Chennai - 600 001
PAN No.AAAC12107B .. Respondent
Appeal filed under Section 260-A of The Income Tax Act, 1961 against
the order dated 22.09.2008 passed in ITA No.59/Mds/2007 on the file of
Income Tax Appellate Tribunal Madras "A" Bench.
For Appellant : Mr. Arun Kurian Joseph
For Respondent : Mr. G. Baskar
JUDGMENT
(Judgment of the Court was delivered by R. Mahadevan, J)
This tax case appeal is filed by the appellant/Revenue, calling in question
the correctness of the order dated 22.09.2008 passed by Income Tax Appellate
Tribunal Madras "A" Bench in ITA No.59/Mds/2007.
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TCA No. 955 of 2009
2. On 17.09.2009, this tax case appeal was 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 deleting the addition of
Rs.3,51,917/- being interest accrued on non performing assets,
even though the assessee is following a mercantile system of
accounting?
2. Whether on the facts and in the circumstances of the
case, the assessee is entitled to follow a hybrid system of
accounting by showing the interest on non-performing assets only
on receipt basis, while otherwise following a mercantile system of
accounting contrary to the provisions of Section 145 of the
Income Tax Act?
3. Whether the prudential norms issued by the RBI
will have any bearing on computation for the purpose of Income
Tax and whether it will have an overriding effect over the
provisions of the Income Tax Act?
4. Whether on the facts and in the circumstances of the
case, the Tribunal was right in holding that interest under Section
234D cannot be charged in respect of the refund granted prior to
the insertion of the Section 234D, when the regular assessment
was completed only subsequent to the insertion of Section 234D?
5. Whether on the facts and in the circumstances of the
case, no interest can be charged even for the period subsequent to
the introduction of Section 234D mainly on the ground that the
refund was granted prior to its introduction?
3. Heard the learned counsel for both sides. It is brought to the
notice of this Court that as against the very same order dated 22.09.2008 of the
Tribunal, the Department has filed two appeals namely T.C.A. No. 955 of 2009
and T.C.A. No. 956 of 2009, out of which, T.C.A. No. 956 of 2009 was
dismissed, on account of low tax effect, by order dated 19.08.2019.
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TCA No. 955 of 2009
4. That apart, one of the issues involved in this case viz., "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
Delhi High Court in Commissioner of Income Tax vs. Vasisth Chay Vyapar
Limited [(2011) 330 ITR 044], which was subsequently affirmed by the
Hon'ble 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 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
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TCA No. 955 of 2009
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 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
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TCA No. 955 of 2009
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 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
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TCA No. 955 of 2009
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."
5. In the light of the above decision, the substantial question of law
Nos.1 to 3 raised in this appeal are answered in favour of the respondent /
assessee and against the appellant / revenue.
6. Regarding the question of law nos.4 & 5, the learned counsel for
the appellant placed reliance on the Judgment in Commissioner of Income
Tax-I v. Reliance Energy Limited [358 ITR 371(SC)], wherein, it was held as
follows:
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TCA No. 955 of 2009
"3.Learned counsel for the assessee places reliance on
Explanation (2) inserted in Section 234D of the Act by the
Finance Act, 2012 with effect from 01.06.2003.
4.Explanation (2) which has been inserted in Section 234D
of the Act reads as under:-
"Explanation 2.-For the removal of doubts, it is hereby
declared that the provisions of this section shall also apply to an
asessment year commencing before the 1st day of June, 2003 if
the proceedings in respect of such assessmen year is completed
after the said date"
5.The High Court was concerned with the appeal relating
to the assessment year 1998-1999. It is admitted case that the
assessment of that year was completed prior to 01.06.2003.
6.Having regard to the legal position which has been
clarified by the Parliament by insertion of Explanation (2) in
Section 234D, in the present case, retrospectively of Section
234D does not arise.
7.Having regard to above position, the view of the High
Court in relying upon the decision of the Bombay High Court in
M/s. Delta Air Lines Inc., (supra) cannot be said to be erroneous.
8.Special Leave Petition is dismissed"
7. In the light of the aforesaid decision, which squarely applies to the
facts of the present case, wherein, the proceedings in respect of the assessment
year was completed on 28.02.2006, which is, subsequent to the insertion of
Section 234D of the Act by the Finance Act, 2012 i.e., on 01.06.2003, the
substantial question of law Nos.4 and 5 relating to levy of interest on the
excess refund amount under Section 234D, are answered in favour of the
appellant / Revenue and against the respondent / assessee and the matter is
remanded back to the Assessing Officer for fresh consideration and pass
appropriate orders, on merits and in accordance with law, after issuing due
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TCA No. 955 of 2009
notice and affording an opportunity of hearing to the respondent / assessee,
within a period of eight weeks from the date of receipt of a copy of this order.
8. Accordingly, the Tax case Appeal stands disposed of. No costs.
(R.M.D.,J.) (J.S.N.P.,J.)
25.04.2022
Index : Yes/No
Internet : Yes/No
rsh/dhk
To
1. The Commissioner of Income Tax-I
Chennai
2.Income Tax Appellate Tribunal Madras "A" Bench
Chennai.
https://www.mhc.tn.gov.in/judis
TCA No. 955 of 2009
R. MAHADEVAN, J.
and
J. SATHYA NARAYANA PRASAD, J.
rsh/dhk
TCA No. 955 of 2009
25.04.2022
https://www.mhc.tn.gov.in/judis
