The Commissioner Of Income Tax-I v. M/S. Elgi Finance Limitedindia Housetrichy Roadcoimbatore - 18

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 07.12.2021 CORAM : THE HONOURABLE MR. JUSTICE R. MAHADEVANandTHE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ Tax Case Appeal Nos. 1307, 1308 and 1309 of 2010 The Commissioner of Income Tax-I.. Appellant in allCoimbatore the Appeals Versus M/s. Elgi Finance LimitedIndia HouseTrichy RoadCoimbatore - 18 .. Respondent in all(PAN No. ) the appeals TCA No. 1307 of 2010:- Appeal filed under Section 260-A ofThe Income Tax Act, 1961 against the order dated 11.06.2010passed in I.T.A. No. 1879/Mds/2004 on the file of Income TaxAppellate Tribunal, "B" Bench, Chennai. for the Assessment year1995-1996 TCA No. 1308 of 2010:- Appeal filed under Section 260-A ofThe Income Tax Act, 1961 against the order dated 11.06.2010passed in I.T.A. No. 1880/Mds/2004 on the file of Income TaxAppellate Tribunal, "B" Bench, Chennai. for the Assessment year1996-1997 TCA No. 1309 of 2010:- Appeal filed under Section 260-A ofThe Income Tax Act, 1961 against the order dated 11.06.2010passed in I.T.A. No. 1881/Mds/2004 on the file of Income TaxAppellate Tribunal, "B" Bench, Chennai. for the Assessment year1997-1998. Against the order The Income Tax (Appeals)I, Coimbatore,Dated 30/06/2004, 23/06/2004 in made in Appeal No.94,92,&93/ 03-04 and against the order of the Assistant Commissioner of IncomeTax Company Circle-I(I) i/c Combatore, dated 28/03/2003 and madein PA.No./G.I.R.No.AAA CE4564E in TCA 1307/2010 and CD-2239 (inTCA 1308 and 13/09/2010 for the Assessment year 1995-1996, 1996-1997 and 1997-1998 respectively. For Appellant : Mr. M. Swaminathan, Senior Standing Counsel for Mrs. K.G.Usha Rani, Junior Standing Counsel in all the Appeals For Respondent :Mrs. Lakshmi Sriramin all the Appeals COMMON JUDGMENT(Judgment of the Court was delivered by R. Mahadevan, J) These tax case appeals have been filed by theappellant/Revenue, calling in question the correctness of theorder dated 11.06.2010 passed by the Income Tax AppellateTribunal, 'B' Bench, Chennai, in I.T.A.Nos.1879, 1880 and1881/MDS/2004, relating to the assessment years 1995-1996, 1996-1997 and 1997-1998, respectively. On 08.02.2011, TC (A) No.1307 of 2010 was admitted on the following substantial questionsof law:- "1. Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in law in holding that interest onNon-performing "Asset was not to be included in thetotal income of the assessee on accrual basis, eventhough the assessee was following Mercantile System ofaccounting is valid. 2. Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in law in holding that thedisallowance of deposit mobilization expensesamounting to Rs.52,52,593/- even though the aforesaidsum was never disallowed by the assessing officereither in the original assessment or the re-assessmentwas made by the Assessing Officer? and 3. Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in holding that the re-opening ofthe Assessment under Section 148 of the Income TaxAct, 1961 was issued beyond the four years, eventhough, before the Assessing Officer issue ofbrokerage was never considered in the originalassessment or re-assessment nor were the detailsproduced by the assessee in the course of assessment." 2. Similarly, on 08.02.2021, TCA Nos. 1308 and 1309 of2010 were also admitted by this Court on the followingsubstantial question of law:- (i) Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in law in holding that interest on Non-performing Asset was not to be included in the totalincome of the assessee on accrual basis, even thoughthe assessee was following Mercantile System ofaccounting is valid? 2. Similarly, on 08.02.2021, TCA Nos. 1308 and 1309 of2010 were also admitted by this Court on the followingsubstantial question of law:- (i) Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in law in holding that interest on Non-performing Asset was not to be included in the totalincome of the assessee on accrual basis, even thoughthe assessee was following Mercantile System ofaccounting is valid? 3. When these appeals are taken up for considerationtoday, the learned counsel for the appellant/Revenue brought tothe notice 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. 4. Notwithstanding the above, one of the issues involvedin these 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. Thedecision of the Division Bench of the Delhi High Court canprofitably be extracted hereunder:- "17. In this scenario, we have to examine thestrength in the submission of learned counsel for theRevenue that whether it can still be held that incomein the form of interest though not received had stillaccrued to the assessee under the provisions of IncomeTax Act and was, therefore, eligible to tax. Our answeris in the negative and we give the following reasons insupport:- (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 admitted positionis that the assessee had not received any interest onthe said ICD placed with Shaw Wallce since theassessment year 1996-97 as it had become NPAs inaccordance with the Prudential norms which was enteredin the books of accounts as well. The assessee has further successfully demonstrated that even in thesucceeding assessment years, no interest was receivedand the position remained the same until the assessmentyears 2006-07. Reason was adverse financialcircumstances and the financial crunch faced by ShawWallace. So much so, it was facing winding up petitionswhich were filed by many creditors. Thesecircumstances, led to an uncertainty in so far asrecovery of interest was concerned, as a result of theaforesaid precarious financial position of ShawWallace. What to talk of interest, even the principalamount itself had become doubtful to recover. In thisscenario it was legitimate move to infer that interestincome thereupon has not "accrued". We are in agreementwith the submission of Mr. Vohra on this count,supported by various decisions of different High Courtsincluding this court which has already been referred toabove. (2) In the instant case, the assessee companybeing NBFC is governed by the provisions of RBI Act. Insuch a case, interest income cannot be said to haveaccrued to the assessee having regard to the provisionsof section 45Q of the RBI and Prudential Norms issuedby the RBI in exercise of its statutory powers. As perthese norms, the ICD had become NPA and on such NPAwhere the interest was not received and possibility ofrecovery was almost nil, it could not be treated tohave been accrued in favour of the assessee. 18. As noted above, Mr. Sabharwal, argued that thecase of the assessee was to be dealt with for thepurpose of taxability as per the provisions of the Actand not the RBI Act which was the accounting methodthat the assessee was supposed to follow. We havealready held that even under the Income Tax Act,interest income had not accrued. Moreover, thissubmission of Mr. Sabharwal is based entirely on thejudgment of the Supreme Court in the case of SouthernTechnology (supra). No doubt, in first blush, readingof the judgment gives an indication that the Court hasheld that RBI Act does not override the provisions ofthe Income Tax Act. However, when we examine the issueinvolved therein minutely and deeply in the context inwhich that had arisen and certain observations of theApex Court contained in that very judgment, we findthat the proposition advanced by Mr. Sabharwal may notbe entirely correct. In the case before the SupremeCourt, the assessee a NBFC debited Rs.81,68,516 asprovision 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 notallow the deduction claimed as aforesaid on the groundthat the provision of NPA was not in the nature ofexpenditure or loss but more in the nature of areserve, and thus not deductible under Sectrion 36 (i)(vii) of the Act. The assessing officer, however, didnot bring to tax Rs.20,34,605 as income (being incomeaccrued under the mercantile system of accounting). Thedispute before the Apex court centered arounddeductibility of provision for NPA. After analyzing theprovisions of the RBI Act, their Lordships of the ApexCourt observed that in so far as the permissibledeductions or exclusions under the Act are concerned,thesameareadmissibleonlyifsuchdeductions/exclusions satisfy the relevant conditionsstipulated therefor under the Act. To that extent, itwas observed that the Prudential Norms do not overridethe provisions of the Act. However, the Apex Court madea distinction with regard to "Income Recognition" andheld that income had to be recognized in terms of thePrudential Norms, even though the same deviated frommercantile system of accounting and/or Section 45 ofthe Income Tax Act. It can be said, therefore, that theApex Court 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, andincome recognition on the other:- ........ 40. At the outset, we may state that inessenceRBIDirections1998arePrudential/Provisioning Norms issued by RBI underChapter IIIB of the RBI Act, 1934. These Normsdeal essentially with Income Recognition. Theyforce the NBFCs to disclose the amount of NPA intheir financial accounts. They force the NBFCs toreflect "true and correct" profits. By virtue ofSection 45Q, an overriding effect is given to theDirections 1998 vis-a-vis "income recognition"principles in the Companies Act, 1956. TheseDirections constitute a code by itself. However,these Directions 1998 and the IT Act operate indifferent areas. These Directions 1998 havenothing to do with computation of taxable income.These Directions cannot overrule the "permissible ........ 40. At the outset, we may state that inessenceRBIDirections1998arePrudential/Provisioning Norms issued by RBI underChapter IIIB of the RBI Act, 1934. These Normsdeal essentially with Income Recognition. Theyforce the NBFCs to disclose the amount of NPA intheir financial accounts. They force the NBFCs toreflect "true and correct" profits. By virtue ofSection 45Q, an overriding effect is given to theDirections 1998 vis-a-vis "income recognition"principles in the Companies Act, 1956. TheseDirections constitute a code by itself. However,these Directions 1998 and the IT Act operate indifferent areas. These Directions 1998 havenothing to do with computation of taxable income.These Directions cannot overrule the "permissible deductions" or "their exclusion" under the ITAct. The inconsistency between these Directionsand Companies Act is only in the matter of IncomeRecognition and presentation of FinancialStatements. The Accounting Policies adopted by anNBFC cannot determine the taxable income. It iswell settled that the Accounting Policiesfollowed by a company can be changed unless theAO comes to the conclusion that such change wouldresult in understatement of profits. However,here is the case where the AO has to follow theRBI Directions 1998 in view of Section 45Q of theRBI Act. Hence, as far as Income Recognition isconcerned, Section 145 of the IT Act has no roleto play in the present dispute." 19. We have also noticed the other line of caseswherein the Supreme Court itself has held that whenthere is a provision in other enactment which containsa non-obstante clause, that would override theprovisions of Income Tax Act. TRO Vs. Custodian,Special Court Act (supra) is one such case apart fromother cases of different High Courts. When the judgmentof the Supreme Court in Southern Technology (supra) isread in manner we have read, it becomes easy toreconcile the ratio of Southern Technology with TRO Vs.Custodian, Special Court Act. 20. Thus viewed from any angle, the decision ofthe Tribunal appears to be correct in law. The questionof law is thus decided against the Revenue and infavour of the assessee. As a result, all these appealsare dismissed." 5. In the light of the above coupled with the legalposition enunciated by the Honourable Supreme Court, thesubstantial questions of law raised in these appeals areanswered against the revenue and in favour of the assessee andhence the present appeals are dismissed. No costs. Sd/- rsh TO 1. The Income Tax Appellant, Tribunal B Bench Chennai. Tribunal B Bench Chennai. 2. The Commissioner of Income Tax (Appeals)I, Coimbatore. Coimbatore. 3. The Assistant Commissioner of Income Tax Company Circle-I(I) i/c Combatore. Company Circle-I(I) i/c Combatore. 4. The Commissioner of Income Tax I, Coimbatore. Coimbatore. +3cc to Mrs. Lakshmi Sriram, Advocate, S.R.No.64595+1cc to Mr. M. Swaminathan, Advocate, S.R.No.65370 TCA Nos. 1307-1309/2010 SSD(CO)CT/03/01/2022