Provision for NPA debited to P & L account as per RBI Act, not eligible for deduction under I-T Act – Bad debts under I-T does not include doubtful debts – No conflict between RBI Act and I-T Act : ITAT Special Bench
THE issue before the Special Bench of the ITAT was :
“Whether, a Provision for Non Performing Assets (‘NPA’) debited to profit and loss account and claimed as a deduction in accordance with the prudential norms issued by the RBI in exercise of powers conferred on it under section 45JA of the RBI Act, 1934, called the Non Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998, should be allowed as deduction while computing income from business under the provisions of the Income-tax Act, 1961?”
The appellant is a Non Banking Finance Company (‘NBFC’) registered with the Reserve Bank of India (‘RBI’). The assessee debited a sum of Rs.6,38,758/ – in its profit and loss account, being provision for Non Performing Assets. The assessee submitted that being a NBFC registered with the RBI, it has to follow the prudential norms as prescribed by the RBI from time to time and the deduction claimed in the profit and loss account on account of provision for NPA was in consonance with such guidelines issued by the RBI. As per the prudential norms, lease rental and hire purchase instalments, which have become overdue for a period of 12 months or more have to be termed as NPA and the assessee has to create a provision for such NPA and debit it to the profit and loss account. The assessee relied on the decision of Chennai Bench of the ITAT in the case of Overseas Sanmar Financial Ltd., wherein it has been held that provision for NPA made in consonance with the prudential norms of the RBI has to be allowed as deduction in computing income for the purpose of Income-tax Act also.
The AO, however, held that the assessee did not furnish a detailed calculation of provision for NPA claimed partywise as per RBI guidelines and therefore, the claim of the assessee was disallowed.
On appeal by the assessee, the CIT(A) held that income has to be computed only as per the provisions of the Income-tax Act and the provision for NPA is neither an expenditure nor an allowance which are permitted deductions u/s 28 to 43B of the Act and, therefore, the action of the AO in rejecting the claim of the assessee was justified
At the, time of hearing, the Division Bench of the Tribunal noted that there is an apparent conflict in the decision rendered by various benches of the Tribunal. It was found that in some judgments, the Tribunal have held that provision for NPA made in accordance with prudential norms for NBFC issued by the RBI in exercise of its power under the RBI Act, 1934 are to be allowed as deduction while computing the income under the Income-tax Act: However, in some other cases a contrary view has been adopted:
The Special Bench observed,
1. The RBI Act and the Prudential Norms issued in exercise of the powers conferred by Section 45JA of the RBI Act provide mainly for income recognition accounting standards in order to ensure making of proper provision for bad and doubtful debts, capital adequacy based on the risk weightage etc.
2. The provisions of Chapter IIIB of the RBI Act before the amendment were in existence for more than three decades. The said provisions, however, vested with very limited powers in RBI in as much as the RBI was only empowered to regulate or prohibit issue of prospectus or advertisement soliciting deposits.
3. For violation of directions, the RBI could issue orders prohibiting erring companies from accepting further deposits. So long as these directions relating to deposit acceptance was complied, no further stringent action could be initiated.
4. Thus, the legislative intent in RBI Act and focus thereof were thus mainly to moderate the resource mobilizing exercise by way of deposits by NBFC and thereby providing indirect protection to the depositors by linking the quantum of deposit to their NOF.
5. The RBI Act was amended in January, 1977 by effecting comprehensive changes in Chapter IIIB and V of the RBI Act and vesting more powers with the RBI. The amended Act, inter alia, provides for vesting with the RBI powers to give directions to the NBFC regarding Prudential Norms.
6. The regulatory attention was focused on NBFC accepting public deposits. The RBI has favoured a policy to restrict the short term and the unsecured borrowings of the NBFCs on the strength of their credit rating, the size of NOF and the activities of the companies. While the overall borrowing capacity of NBFCs would be restricted by the capital adequacy requirement, maximum ceiling on public deposits which an NBFC can accept is related to its rating and level of NOF.
7. However, under the Income-tax Act, as per Section 36(1 )(vii) only the bad debt or part thereof which is written off as irrecoverable in the accounts is allowable as deduction.
RBI Act vs Income Tax Act – which is superior?
The Tribunal observed,
1. The Income-tax Act is an act relating to charge of tax on the income of a person as computed under the provisions of the Income-tax Act is concerned. Thus, both the Acts i.e. the RBI Act and the Income-tax Act operate in altogether different fields.
2. The RBI Act is a Special Act in relation to computation of NOF of NBFC whereas Income-tax Act is a special Act so far as computation of tax liability of a person in respect of its income computed under the provisions of the Income-tax Act.
3. Thus, it cannot be said that there is any inconsistency between the two Acts so as to hold that the provision of RBI Act shall have effect notwithstanding anything contained in the Income-tax Act.
4. Though Section 45Q of the RBI Act provides that provisions of Chapter IIIB of the RBI Act shall have effect notwithstanding anything inconsistent therewith contained in any other law, there is no inconsistency between the provision of RBI Act or the Prudential Norms prescribed thereunder and the provisions of the Income-tax Act.
5. Therefore, it cannot be held that the provision made in the accounts of the assessee in respect of NPA shall be treated as sufficient compliance with the provisions of Section 36(1)(vii) of the Income-tax Act so as to allow the provision for bad and doubtful debts as deduction permissible under the Income-tax Act.
Whether provision for NPA debited to profit and loss account can be allowed as deduction while computing income from business under the provisions of Income-tax Act.
Answering this question, the Tribunal observed,
1. Under section 36(1)(vii), only the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts is an allowable deduction.
2. Explanation to Section 36(1)(vii) provides that any bad debt or part thereof written off as irrecoverable shall not include any provision for bad and doubtful debts.
3. The provisions for NPA under the RBI directions is not only in respect of loss assets but also doubtful assets and sub standard assets. Depending upon the period for which the asset has been considered as doubtful, various percentage of the amount is to be provided.
4. Thus, the provisioning requirement under clause 8 of the Prudential Norms is still in respect of doubtful debts or doubtful assets and not in respect of debt which has turned bad
5. Thus, though under the Prudential Norms, NBFC is to make a provision even for doubtful assets or doubtful debts, the statutory condition under the Income-tax Act provides that any bad debt or part thereof shall not include any provision for bad and doubtful debts.
6. Thus, so long as the amounts written off is in respect of provision for bad and doubtful debts or provision for NPA or so long as amount provided is not in respect of a bad debt, the same is not allowable as deduction u/s 36(1)(vii).
7. Section 36(1)(vii) provides for allowance of ‘bad debt’ and not ‘any debt’. Thus, the pre condition is that the debt has turned into ‘bad debt’ and not anything else.
So the Special Bench held that there is no error in the order of the CIT(A) in not allowing provision for NPA debited to profit and loss account.
An alternate contention has been raised that if deduction claimed in respect of provision for NPA is not admissible, a proper direction be given that as and when this amount is received and shown as income as per RBI’s directions in computing the income of subsequent years, the same should be accordingly reduced.
The tribunal agreed with this. If the deduction is not allowed in respect of provision for NPA itself, since the amount received is in respect of capital sum lent, it do not partake the character of income when subsequently such amount is realized. If on the first instance, the deduction is not allowed in respect of NPA, subsequent realization of such NPA is realizing its capital itself and hence, cannot be considered as income though treated as such under the RBI Act. The amount recovered is not an income u/s 41(4) unless in the first instance is allowed as deduction u/s 36(1)(vii).
Sub: Allowance of Deduction against Provisioning for NPAs
This is one of the long standing demands of the NBFC sector. While in the above case the concerned NBFC contested the matter on different grounds, the real issue lies in the sheer discrimination against the NBFC sector being shown by the government.
While all other players like banks, FIs, Housing Finance companies and Co-operative banks are allowed deduction u/s 36(1) of the IT Act against provisioning made by them, the same is denied only to the NBFC sector.
We have been representing on this matter for the last 10 years now. Every year this issue is on the top of our list of pre-budget memorandum submitted to the Finance Ministry.
There seems to be no logical reason for the govt to deny this benefit ONLY TO NBFCs.
Finance Industry Development Council
(SRO for NBFC-AFCs)