Case Law Details
An interesting question of law which arises for determination in these Civil Appeals filed by Non-banking Financial Companies (NBFCs for short) is:
Whether the Department is entitled to treat the ‘Provision for NPA, which in terms of RBI Directions 1998 is debited to the P&L Account, as income under Section 2(24) of the Income Tax Act, 1961 , while computing the profits and gains of the business under Sections 28 to 43D of the IT Act?
Facts
For the sake of convenience, we may refer to the facts in the case of M/s. Southern Technologies Ltd. [Civil Appeal No. 1337 of 2003].
At the outset, it may be stated that categorisation of assets into doubtful, sub-standard and loss is not in dispute.
The financial year of the Appellant is July to June and the P&L Account and the Balance Sheet are drawn as on 30th June. The P&L Account and Balance Sheet is for shareholders, Reserve Bank of India (RBI) and Registrar of Companies (ROC) under the Companies Act, 1956. However, for IT Act, a separate P&L Account is made out for the year ending 31st March and the Balance Sheet as on that date is prepared and submitted to the Assessing Officer(AO) for computing the Total Income under the IT Act, which is not for use of RBI or ROC.
For the accounting year ending 31.03.1998, Assessee debited Rs. 81,68,516/- as Provision against NPA in the P&L Account on three counts, viz., Hire-Purchase of Rs. 57,38,980/-, Bill Discounting of Rs. 12,79,500/-
and Loans and Advances of Rs. 31,84,701/-, in all, totalling Rs. 1,02,03,121/- from which AO allowed deduction of Rs. 20,34,605/- on account of Hire Purchase Finance Charges leaving a balance provision for NPA of Rs. 81,68,516/-.
Before the AO, Assessee claimed deduction in respect of Rs. 81,68,516/- under Section 36(1)(vii) being Provision for NPA in terms of RBI Directions 1998 on the ground that Assessee had to debit the said amount to P&L Account [in terms of Para 9(4) of the RBI Directions] reducing its Profits, contending it to be write off. In the alternative, Assessee submitted that consequent upon RBI Directions 1998 there has been diminution in the value of its assets for which Assessee was entitled to deduction under Section 37 as a trading loss. This led to matters going in appeal (s). To conclude, it may be stated that following the judgement of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. Commissioner of Income-Tax, Gujarat-V 130 ITR 95, the ITAT held that since Assessee had debited the said sum of Rs. 81,68,516/- to the P&L Account it was entitled to claim deduction as a write off under Section 36(1)(vii) which view was not accepted by the High Court, hence, this batch of Civil Appeal (s) are filed by NBFCs.
