The Commissioner Of Income Tax-I v. M/S. Sakthi Finance Limited475, Dr. Nanjappa Road

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.1310, 1311 and 1312 of 2010 The Commissioner of Income Tax-I ..Appellant in allCoimbatore the Appeals Versus M/s. Sakthi Finance Limited475, Dr. Nanjappa Road ..Respondent in allCoimbatore - 18 (PAN No. ) the appeals TCA No.1310 of 2010:- Appeal filed under Section 260-A of TheIncome Tax Act, 1961 against the order dated 11.06.2010 passedin I.T.A. No. 3409/Mds/2004 on the file of Income Tax AppellateTribunal, "D" Bench, Chennai for Assessment Year 1996-1997. TCA No.1311 of 2010:- Appeal filed under Section 260-A of TheIncome Tax Act, 1961 against the order dated 11.06.2010 passedin I.T.A. No. 3410/Mds/2004 on the file of Income Tax AppellateTribunal, "D" Bench, Chennai for Assessment Year 1997-1998. TCA No.1312 of 2010:- Appeal filed under Section 260-A of TheIncome Tax Act, 1961 against the order dated 11.06.2010 passedin I.T.A. No. 3411/Mds/2004 on the file of Income Tax AppellateTribunal, "D" Bench, Chennai for Assessment Year 1998-1999 Prayer in TCA.Nos.1310 to 1312 of 2010 : against the order ofthe Assistant Commissioner of Income Tax Company circle -I(1)(i/c), Coimbatore dated 31.03.2003 in Appeal Nos.109/03-04,110/03-04, 111/03-04, pertaining Assessment years 1996-1997 to1998 to 1999 in P.A.No/G.I.R.No.CZ-0166. For Appellant:Mr. M. Swaminathan, Senior Standing Counselfor Mrs. K.G.Usha Rani, Junior Standing Counselin all the Appeals For Respondent :M/s.Vijayaraghavan for M/s.Subbaraya Aiyar, for Respondent 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 theorders dated 11.06.2010 passed by the Income Tax AppellateTribunal, 'D' Bench, Chennai, in I.T.A.Nos.3409/ MDS/2004,3410/MDS/2004 and 3411/MDS/2004, relating to the assessmentyears 1996-1997, 1997-1998 and 1998-1999 respectively. On08.02.2011, these appeals are admitted on the followingsubstantial question of law:- "Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal was rightin law in holding that interest on Non-performingAsset was not to be included in the total income ofthe assessee on accrual basis, even though theassessee was following Mercantile System of accountingis valid." 2. When these appeals are taken up for consideration today,the learned counsel for the appellant/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, the issue involved in theseappeals namely "whether interest on Non-performing Asset was notto be included in the total income of the assessee on accrualbasis, even though the assessee was following Mercantile Systemof 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 income https://hcservices.ecourts.gov.in/hcservices/ "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 income https://hcservices.ecourts.gov.in/hcservices/ in the form of interest though not received had stillaccrued to the assessee under the provisions of IncomeTax Act and was, therefore, eligible to tax. Ouranswer is in the negative and we give the followingreasons 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 Wallce sincethe assessment year 1996-97 as it had become NPAs inaccordance with the Prudential norms which was enteredin the books of accounts as well. The assessee hasfurther successfully demonstrated that even in thesucceeding assessment years, no interest was receivedand the position remained the same until theassessment years 2006-07. Reason was adverse financialcircumstances and the financial crunch faced by ShawWallace. So much so, it was facing winding uppetitions which 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 inagreement with the submission of Mr. Vohra on thiscount, supported by various decisions of differentHigh Courts including this court which has alreadybeen referred 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 to haveaccrued 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 NPA andon such NPA where the interest was not received andpossibility of recovery was almost nil, it could notbe 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 for thepurpose of taxability as per the provisions of the Act (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 to haveaccrued 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 NPA andon such NPA where the interest was not received andpossibility of recovery was almost nil, it could notbe 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 for thepurpose of taxability as per the provisions of the Act and 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).The dispute before the Apex court centered arounddeductibility of provision for NPA. After analyzingthe provisions of the RBI Act, their Lordships of theApex Court 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 Courtmade a distinction with regard to "Income Recognition"and held that income had to be recognized in terms ofthe Prudential Norms, even though the same deviatedfrom mercantile system of accounting and/or Section 45of the Income Tax Act. It can be said, therefore, thatthe Apex Court approved the 'real income" theory whichis engrained in the Prudential Norms for recognitionof revenue 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 in essenceRBI Directions 1998 are Prudential/Provisioning Normsissued 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 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, theseDirections 1998 and the IT Act operate in differentareas. These Directions 1998 have nothing to do withcomputation of taxable income. These Directions cannotoverrule the "permissible deductions" or "theirexclusion" under the IT Act. The inconsistency betweenthese Directions and Companies Act is only in thematter of Income Recognition and presentation ofFinancial Statements. The Accounting Policies adoptedby an NBFC cannot determine the taxable income. It iswell settled that the Accounting Policies followed bya company can be changed unless the AO comes to theconclusion that such change would result inunderstatement of profits. However, here is the casewhere the AO has to follow the RBI Directions 1998 inview of Section 45Q of the RBI Act. Hence, as far asIncome Recognition is concerned, Section 145 of the ITAct has no role to play in the present dispute." 19. We have also noticed the other line ofcases wherein the Supreme Court itself has heldthat when there is a provision in other enactmentwhich contains a non-obstante clause, that wouldoverride the provisions of Income Tax Act. TROVs. Custodian, Special Court Act (supra) is onesuch case apart from other cases of differentHigh Courts. When the judgment of the SupremeCourt in Southern Technology (supra) is read inmanner we have read, it becomes easy to reconcilethe 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." 4.In the light of the above, coupled with the legal positionenunciated by the Honourable Supreme Court, the substantial https://hcservices.ecourts.gov.in/hcservices/ question of law raised in these appeals is answered against therevenue and in favour of the assessee and hence the presentappeals are dismissed. No costs. Sd/- Assistant Registrar(CCC) //True Copy// Sub Assistant Registrar rsh To 1. The Income Tax Appellate Tribunal, “D” Bench, Chennai. 2. The Commissioner of Income Tax-I, Coimbatore. 3. The Assistant Commissioner of Income Tax, Company Circle-I(1) i/c Coimbatore. +1cc to Mr.M.Swaminathan, Advocate, S.R.No.65371 +1cc to M/s.Subbaraya Aiyar, Advocate, S.R.No.65038 SRA(CO)RGA(07/01/2022) TCA Nos. 1310-1312/2010