M/S.sakthi Finance Limited v. The Assistant Commissioner Of Income Tax,Company Circle - I(1),Coimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 07.12.2021 CORAM: THE HONOURABLE MR.JUSTICE R.MAHADEVANANDTHE 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,Coimbatore - 641 018. ... Appellant in allthe Appeals Versus The Assistant Commissioner of Income Tax,Company Circle - I(1),Coimbatore. ... Respondent in allthe Appeals T.C.A.NO.373 OF 2011:- Appeal filed under Section 260-A of The Income Tax Act, 1961against 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 for the Assessment Year 1995-1996 and Againsttheorderdated20/10/2004passed inPAN No.AADCS0656G on the file of the Commissioner of Income Tax(Appeals)-I, Coimbatore of Assessment Year 1992-1993 to 1998-1999 and Againsttheorderdated30/03/2004passed inPAN/G.I.R.No.AADCS0656G/CO.CIR.I(1),CBE on the file of theAssistant Commissioner of Income-Tax, Company Circle-I(1),Coimbatore of Assessment Year 1995-1996 and Againsttheorderdated16/03/1998passed in PAN/G.I.R.No.47-023-CZ-0166 on the file of the DeputyCommissioner of Income Tax, Special Range-I, Coimbatore ofAssessment Year 1995-1996. T.C.A.NO.374 OF 2011:- Appeal filed under Section 260-A of The Income Tax Act, 1961against 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 for the Assessment Year 1996-1997 and Againsttheorderdated20/10/2004passed inPAN No.AADCS0656G on the file of the Commissioner of Income Tax(Appeals)-I, Coimbatore of Assessment Year 1992-1993 to 1998-1999 and Againsttheorderdated31/03/2003passed inPAN/G.I.R.No.AADCS0656G/CO.I(1)/CBE on the file of the DeputyCommissioner of Income-Tax, Company Circle-I(1), Coimbatore ofAssessment Year 1996-1997 and Againsttheorderdated08/02/1999passed inPAN/G.I.R.No.47-023-CZ-0166 on the file of the JointCommissioner of Income Tax, Special Range-I, Coimbatore ofAssessment Year 1996-1997. T.C.A.NO.375 OF 2011:- Appeal filed under Section 260-A of The Income Tax Act, 1961against 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 of Assessment Year 1997-1998 and Againsttheorderdated20/10/2004passed inPAN No.AADCS0656G on the file of the Commissioner of Income Tax(Appeals)-I, Coimbatore of Assessment Year 1992-1993 to 1998-1999 and Againsttheorderdated31/03/2003passed inPAN/G.I.R.No.AADCS0656G/CO.I(1)/CBE on the file of the DeputyCommissioner of Income-Tax, Company Circle-I(1), Coimbatore ofAssessment Year 1997-1998 and Againsttheorderdated06/08/1999passed inPAN/G.I.R.No.47-023-CZ-0166 on the file of the JointCommissioner of Income Tax, Special Range-I, Coimbatore ofAssessment Year 1997-1998. T.C.A.No.376 of 2011:- Appeal filed under Section 260-A of The Income Tax Act, 1961against the order dated 07.07.2006 passed in Int.A.No.18/ https://hcservices.ecourts.gov.in/hcservices/ Mds/2005 on the file of Income Tax Appellate Tribunal, Madras"D" Bench of Assessment Year 1998-1999 andAgainsttheorderdated20/10/2004passed inPAN No.AADCS0656G on the file of the Commissioner of Income Tax(Appeals)-I, Coimbatore of Assessment Year 1992-1993 to 1998-1999 and Againsttheorderdated31/03/2003passed inPAN/G.I.R.No.AADCS0656G/CO.I(1)/CBE on the file of the DeputyCommissioner of Income-Tax, Company Circle-I(1), Coimbatore ofAssessment Year 1998-1999 and Againsttheorderdated05/08/1999passed inPAN/G.I.R.No.47-023-CZ-0166 on the file of the JointCommissioner of Income Tax, Special Range-I, Coimbatore ofAssessment Year 1998-1999. COMMON JUDGMENT (Judgment of the Court was delivered by R.Mahadevan, J) https://hcservices.ecourts.gov.in/hcservices/ Mds/2005 on the file of Income Tax Appellate Tribunal, Madras"D" Bench of Assessment Year 1998-1999 andAgainsttheorderdated20/10/2004passed inPAN No.AADCS0656G on the file of the Commissioner of Income Tax(Appeals)-I, Coimbatore of Assessment Year 1992-1993 to 1998-1999 and Againsttheorderdated31/03/2003passed inPAN/G.I.R.No.AADCS0656G/CO.I(1)/CBE on the file of the DeputyCommissioner of Income-Tax, Company Circle-I(1), Coimbatore ofAssessment Year 1998-1999 and Againsttheorderdated05/08/1999passed inPAN/G.I.R.No.47-023-CZ-0166 on the file of the JointCommissioner of Income Tax, Special Range-I, Coimbatore ofAssessment Year 1998-1999. COMMON JUDGMENT (Judgment of the Court was delivered by R.Mahadevan, J) These tax case appeals have been filed by theappellant/assessee, calling in question the correctness of theorders dated 07.07.2006 passed by the Income Tax AppellateTribunal, 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. On08.11.2011, these appeals were admitted on the followingsubstantial questions of law:- "1. Whether on the facts and in thecircumstances of the case, the Tribunal was right inholding that the interest income on Non-performingAsset (Sticky loans) should be assessed to tax onaccrual basis, when the principal amount is doubtfulof recovery." https://hcservices.ecourts.gov.in/hcservices/ 2. Whether on the facts and in thecircumstances of the case, the Tribunal ought tohave appreciated that the income was not accountedon account of uncertainity of realisation and heldthat income does not accrue even under mercantilesystem of accounting? 3. Whether on the facts and in thecircumstances of the case, the Tribunal ought tohave appreciated that RBI guidelines are also inline with the method of determining the real incomeof an assessee and it is in accordance with theratio of the decision of the Apex Court in GodhraElectricity Supply Co., vs. C.I.T. (225 ITR 746) andthe Accounting Standard issued by the CBDT and hencethe non recognition of income in line with the RBIguideline cannot be brought to tax? 2. When these appeals are taken up for consideration today,the learned counsel for the respondent/Revenue brought to thenotice of this court the Circular No.17/2019 dated 08.08.2019issued by the Central Board of Direct Taxes, wherein, it isstipulated that appeals shall not be filed/pursued by theDepartment before the High Court in cases where the tax effectdoes not exceed Rs.1,00,00,000/- (Rupees One Crore). It is alsosubmitted that the tax effect in these appeals is less than thethreshold limit. 3. Notwithstanding the above, one of the issues involved inthese appeals namely "whether interest on Non-performing Assetwas not to be included in the total income of the assessee onaccrual basis, even though the assessee was following MercantileSystem of accounting is valid" is covered by the decision of theDivision Bench of the Delhi High Court in the case ofCommissioner of Income Tax vs. Vasisth Chay Vyapar Limitedreported in (2011) 330 ITR 044, which was subsequently confirmedby the Honourable Supreme court in the order dated 13.12.2017passed in Civil Appeal No. 5811 of 2012 etc., batch. The decisionof the Division Bench of the Delhi High Court can profitably beextracted hereunder:- "17. In this scenario, we have to examine thestrength in the submission of learned counsel forthe Revenue that whether it can still be held thatincome in the form of interest though not receivedhad still accrued to the assessee under theprovisions of Income Tax Act and was, therefore,eligible to tax. Our answer is in the negative andwe give the following reasons in support:- "17. In this scenario, we have to examine thestrength in the submission of learned counsel forthe Revenue that whether it can still be held thatincome in the form of interest though not receivedhad still accrued to the assessee under theprovisions of Income Tax Act and was, therefore,eligible to tax. Our answer is in the negative andwe give the following reasons in support:- (1) First of all we would discuss the matter inthe light of the provisions of Income Tax Act and toexamine as to whether in the given circumstances,interest income has accrued to the assessee. It isstated at the cost of repetition that admittedposition is that the assessee had not received anyinterest on the said ICD placed with Shaw Wallcesince the assessment year 1996-97 as it had becomeNPAs in accordance with the Prudential norms whichwas entered in the books of accounts as well. Theassessee has further successfully demonstrated thateven in the succeeding assessment years, no interestwas received and the position remained the sameuntil the assessment years 2006-07. Reason wasadverse financial circumstances and the financialcrunch faced by Shaw Wallace. So much so, it wasfacing winding up petitions which were filed by manycreditors. These circumstances, led to anuncertainty in so far as recovery of interest wasconcerned, as a result of the aforesaid precariousfinancial position of Shaw Wallace. What to talk ofinterest, even the principal amount itself hadbecome doubtful to recover. In this scenario it waslegitimate move to infer that interest incomethereupon has not "accrued". We are in agreementwith the submission of Mr. Vohra on this count,supported by various decisions of different HighCourts including this court which has already beenreferred to above. (2) In the instant case, the assessee companybeing NBFC is governed by the provisions of RBI Act.In such a case, interest income cannot be said tohave accrued to the assessee having regard to theprovisions of section 45Q of the RBI and PrudentialNorms issued by the RBI in exercise of its statutorypowers. As per these norms, the ICD had become NPAand on such NPA where the interest was not receivedand possibility of recovery was almost nil, it couldnot be treated to have been accrued in favour of theassessee. 18. As noted above, Mr. Sabharwal, argued thatthe case of the assessee was to be dealt with forthe purpose of taxability as per the provisions ofthe Act and not the RBI Act which was the accountingmethod that the assessee was supposed to follow. Wehave already held that even under the Income TaxAct, interest income had not accrued. Moreover, thissubmission of Mr. Sabharwal is based entirely on the 18. As noted above, Mr. Sabharwal, argued thatthe case of the assessee was to be dealt with forthe purpose of taxability as per the provisions ofthe Act and not the RBI Act which was the accountingmethod that the assessee was supposed to follow. Wehave already held that even under the Income TaxAct, interest income had not accrued. Moreover, thissubmission of Mr. Sabharwal is based entirely on the judgment of the Supreme Court in the case ofSouthern Technology (supra). No doubt, in firstblush, reading of the judgment gives an indicationthat the Court has held that RBI Act does notoverride the provisions of the Income Tax Act.However, when we examine the issue involved thereinminutely and deeply in the context in which that hadarisen and certain observations of the Apex Courtcontained in that very judgment, we find that theproposition advanced by Mr. Sabharwal may not beentirely correct. In the case before the SupremeCourt, the assessee a NBFC debited Rs.81,68,516 asprovision against NPA in the profit and lossaccount, which was claimed as deduction in terms ofSection 36 (1) (vii) of the Act. The assessingofficer did not allow the deduction claimed asaforesaid on the ground that the provision of NPAwas not in the nature of expenditure or loss butmore in the nature of a reserve, and thus notdeductible under Sectrion 36 (i) (vii) of the Act.The assessing officer, however, did not bring to taxRs.20,34,605 as income (being income accrued underthe mercantile system of accounting). The disputebefore the Apex court centered around deductibilityof provision for NPA. After analyzing the provisionsof the RBI Act, their Lordships of the Apex Courtobserved that in so far as the permissibledeductions or exclusions under the Act areconcerned, the same are admissible only if suchdeductions/exclusionssatisfytherelevantconditions stipulated therefor under the Act. Tothat extent, it was observed that the PrudentialNorms do not override the provisions of the Act.However, the Apex Court made a distinction withregard to "Income Recognition" and held that incomehad to be recognized in terms of the PrudentialNorms, even though the same deviated from mercantilesystem of accounting and/or Section 45 of the IncomeTax Act. It can be said, therefore, that the ApexCourt approved the 'real income" theory which isengrained in the Prudential Norms for recognition ofrevenue by NBFC. The following passage from thejudgment of the Apex Court would bring out thedistinction noticed by the Apex Court betweenpermissible deductions/exclusions, on the one hand,and income recognition on the other:- ........ 40. At the outset, we may state that inessence RBI Directions 1998 are Prudential/ ........ 40. At the outset, we may state that inessence RBI Directions 1998 are Prudential/ Provisioning Norms issued by RBI underChapter IIIB of the RBI Act, 1934. TheseNormsdealessentiallywithIncomeRecognition. They force the NBFCs to disclosethe amount of NPA in their financialaccounts. They force the NBFCs to reflect"true and correct" profits. By virtue ofSection 45Q, an overriding effect is given tothe Directions 1998 vis-a-vis "incomerecognition" principles in the Companies Act,1956. These Directions constitute a code byitself. However, these Directions 1998 andthe IT Act operate in different areas. TheseDirections 1998 have nothing to do withcomputation of taxable income. TheseDirections cannot overrule the "permissibledeductions" or "their exclusion" under the ITAct. The inconsistency between theseDirections and Companies Act is only in thematter of Income Recognition and presentationof Financial Statements. The AccountingPolicies adopted by an NBFC cannot determinethe taxable income. It is well settled thatthe Accounting Policies followed by a companycan be changed unless the AO comes to theconclusion that such change would result inunderstatement of profits. However, here isthe case where the AO has to follow the RBIDirections 1998 in view of Section 45Q of theRBI Act. Hence, as far as Income Recognitionis concerned, Section 145 of the IT Act hasno role to play in the present dispute." 19. We have also noticed the other line ofcases wherein the Supreme Court itself has held thatwhen there is a provision in other enactment whichcontains a non-obstante clause, that would overridethe provisions of Income Tax Act. TRO Vs. Custodian,Special Court Act (supra) is one such case apartfrom other cases of different High Courts. When thejudgment of the Supreme Court in Southern Technology(supra) is read in manner we have read, it becomeseasy to reconcile the ratio of Southern Technologywith TRO Vs. Custodian, Special Court Act. 20. Thus viewed from any angle, the decision ofthe Tribunal appears to be correct in law. Thequestion of law is thus decided against the Revenueand in favour of the assessee. As a result, allthese appeals are dismissed." https://hcservices.ecourts.gov.in/hcservices/ 4. In the light of the above, the questions of law raised inthese appeals are answered in favour of the assessee and againstthe revenue and accordingly, the present appeals are disposedof. No costs. Sd/-Assistant Registrar(CS V) //True Copy//Sub Assistant Registrar rsh To 1.The Income Tax Appellate Tribunal,Madras “D” Bench.2.The Assistant Commissioner of Income Tax,Company Circle I(1),Coimbatore.3.The Commissioner of Income Tax (Appeals)-I,Coimbatore.4.The Deputy Commissioner of Income-Tax,Special Range-I,Coimbatore.5.The Joint Commissioner of Income Tax,Special Range-I,Coimbatore. +1cc to M/s.Subbaraya Aiyar, Advocate, S.R.No.65055+1cc to Mr.M.Swaminathan, Advocate, S.R.No.65372 T.C.A.NOS.373, 374, 375AND 376 OF 2011 NR(CO)PBS/21/01/2022