The Commissioner Of Income Tax-I,Coimbatore v. M/S.sakthi Finance Limited

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.334, 335 AND 336 OF 2011 The Commissioner of Income Tax-I,Coimbatore. ... Appellant in allthe appeals Versus M/s.Sakthi Finance Limited,475, Dr.Nanjappa Road,Coimbatore – 18. (PAN No. ) ... Respondent in allthe appeals PRAYER IN T.C.A.No.334 of 2011:- Appeal filed under Section 260-A of The Income Tax Act, 1961against 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 for the Assessment Year 2003-2004. Against the Appellate order passed by the Commissioner ofIncome Tax (A)-I, Coimbatore dated 28/07/2010 made in AppealNo.264/2009-2010 for the Assessment Year 2003-2004, and Against the Assessment order passed by the AssistantCommissioner of Income-Tax, Company Circle-I(1), Coimbatoredated 29/12/2009 in PAN No./GIR No. for the AssessmentYear 2003-2004. PRAYER IN T.C.A.No.335 of 2011:- Appeal filed under Section 260-A of The Income Tax Act, 1961against 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 for the Assessment Year 2004-2005. https://hcservices.ecourts.gov.in/hcservices/ Against the Appellate order passed by the Commissioner ofIncome Tax (A)-I, Coimbatore dated 28/07/2010 in Appeal No.265/2009-2010 for the Assessment Year 2004-2005, and Against the Assessment order passed by the AssistantCommissioner of Income-Tax, Company Circle-I(1), Coimbatoredated 29/12/2009 in PAN No./GIR No. for the AssessmentYear 2004-2005. PRAYER IN T.C.A.No.336 of 2011:- Appeal filed under Section 260-A of The Income Tax Act, 1961against 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 the Assessment Year 2007-2008. Against the Appellate order passed by the Commissioner ofIncome Tax (A)-I, Coimbatore dated 29/07/2010 in Appeal No.225/2009-2010 for the Assessment Year 2007-2008, and Against the Assessment order passed by the AssistantCommissioner of Income-Tax, Company Circle-I(1), Coimbatoredated 31/12/2009 in PAN No./GIR No. for the AssessmentYear 2007-2008. 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 16.12.2010 passed by the Income Tax AppellateTribunal, "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/2010relating to the assessment years 2003-2004, 2004-2005 and2007-2008 respectively. On 02.11.2011, these appeals are https://hcservices.ecourts.gov.in/hcservices/ admitted on the following substantial question of law:- "Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in law in holding that Finance charges 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. 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. 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. 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:- (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 position 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. (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 thejudgment 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/Provisioning Norms issued by RBI under ChapterIIIB of the RBI Act, 1934. These Norms dealessentially with Income Recognition. Theyforce the NBFCs to disclose the amount of NPA ........ 40. At the outset, we may state that inessence RBI Directions 1998 are Prudential/Provisioning Norms issued by RBI under ChapterIIIB of the RBI Act, 1934. These Norms dealessentially with Income Recognition. Theyforce the NBFCs to disclose the amount of NPA in their financial accounts. They force theNBFCs to reflect "true and correct" profits.By virtue of Section 45Q, an overriding effectis given to the Directions 1998 vis-a-vis"income recognition" principles in theCompanies Act, 1956. These Directionsconstitute a code by itself. However, theseDirections 1998 and the IT Act operate indifferent areas. These Directions 1998 havenothing to do with computation of taxableincome. These Directions cannot overrule the"permissible deductions" or "their exclusion"under the IT Act. The inconsistency betweenthese Directions and Companies Act is only inthe matter of Income Recognition andpresentation of Financial Statements. TheAccounting Policies adopted by an NBFC cannotdetermine the taxable income. It is wellsettled that the Accounting Policies followedby a company can be changed unless the AOcomes to the conclusion that such change wouldresult in understatement of profits. However,here is the case where the AO has to followthe RBI Directions 1998 in view of Section 45Qof the RBI Act. Hence, as far as IncomeRecognition is concerned, Section 145 of theIT Act has no role to play in the presentdispute." 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." 4. In the light of the above, the question of law raised inthese appeals is answered in favour of the assessee and against https://hcservices.ecourts.gov.in/hcservices/ the revenue and hence, the present Tax Case Appeals aredismissed. No costs. Sd/-Assistant Registrar(CCC) //True Copy// Sub Assistant Registrar rsh To1.The Income Tax Appellate Tribunal,“B” Bench, Chennai.2.The Commissioner of Income Tax (A)-1,Coimbatore.3.The Assistant Commissioner of Income-Tax,Company Circle I(1),Coimbatore. +1cc to Mr.M.Swaminathan, Advocate, S.R.No.65373+1cc to Mr.Subburaya Aiyar, Advocate, S.R.No.65056 T.C.A.NOS.334 TO 336 OF 2011 EV(CO)PBS/20/01/2022