JOINT COMMISSIONER OF INCOME TAX v. INDIA EQUIPMENT LEASING LTD
[Citation -2006-LL-0310]

Citation 2006-LL-0310
Appellant Name JOINT COMMISSIONER OF INCOME TAX
Respondent Name INDIA EQUIPMENT LEASING LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 10/03/2006
Assessment Year 1997-98
Judgment View Judgment
Keyword Tags mercantile system of accounting • change in method of accounting • non-banking financial company • public financial institution • higher rate of depreciation • infrastructure development • hire purchase transaction • not ordinarily resident • unabsorbed depreciation • bad and doubtful debts • concept of real income • computation of income • legislative intention • method of computation • non-banking companies • non-performing asset • investment allowance • sales tax liability • payment of interest • revenue expenditure
Bot Summary: Ld. DR replying to the reliance placed by the Ld. AR of the assessee o n the decision of the various ITAT submitted that in the case of TEDCO Investment Financial Services Ltd. submitted that in this case Tribunal went by the presumption that Income-tax Act is a General Act and RBI Act being a Special Act, will override the provisions of General Act i.e., Income- tax Act. Section 45JA of Reserve Bank of India Act was inserted by Act 23 of 1997 with retrospective effect from 9-1-1997 The President of India promulgated t h e Reserve Bank of India Ordinance 1997, on 9-1-1997 as Parliament was not in session. Chapter III-B containing the provisions relating to NBFCs was inserted i n the Reserve Bank of India Act, 1934 by Amendment Act 55 of 1963 - Statement of objects and reasons read as under: The existing enactments relating to banks do not provide for any control over companies or institutions which although they are not treated as banks, accept deposits from the general public or carry on other business which is allied t o banking. In order to determine this issue we have to examine:- The nature of Income-tax Act and Reserve Bank of India Act, whether Special Act or General Act. As Justice Ramesan has pointed out in Gunepally Thammayya v. Rajah Tyadapasupati Khandendu Dora AIR 1930 Mad. 963, most Acts can be classed as General Acts from one point of view and Special Act from another. The Reserve Bank of India Act is Special Act, for purpose of banking regulations and the Income-tax Act is General Act with reference banking activities. We after examination of the nature and field of operation of both the Acts have held that the Income-tax Act is a Special Act and RBI is a General Act.


These cross appeals by revenue and assessee for assessment year 1997-98 arise out of order of CIT(A)-IX, Chennai. 2. First we will take up assessee's appeal in ITA No. 2021/Mds./2000. first issue for consideration relates to recognition of income from non-performing assets. facts of case as apparent from record are that assessee is non-banking financial company and recognised by Reserve Bank of India. assessee is following mercantile system of accounting. During course of assessment proceedings, Assessing Officer found that assessee had not included income on Non-Performing Assets (NPAs), while computing returned income. assessee vide his letter dated 26-2-2000 stated that it was following prudential norms prescribed by Reserve Bank of India and based on guidelines issued by Institute of Chartered Accountants of India and Reserve Bank of India, they have not recognised income in Profit & Loss Account in respect of non-performing assets. Assessing Officer further noted that in earlier years similar disallowance was made which was confirmed by Ld CIT. Accordingly, he added amount of Rs. 1,30,78,653 being interest income on non-performing assets not credited to profit and loss account. O n appeal, ld. CIT(A) confirmed additions following his orders for earlier years. 3. Before us ld. AR of assessee submitted that assessee is recognised s non-banking financial company by Reserve Bank of India. prudential norms for recognition of income, contained in guidelines issued by Reserve Bank of India are binding on assessee. prudential norms issued by Reserve Bank of India vide their letter dated 13-6-1994 lay down conditions for income recognition and accounting standards to be followed by NBFCs. As per guidelines, asset becomes non-performing when it ceases to yield income at least for six months and from such non-performing assets income may not be recognised merely on basis of accrual. income from NPAs, therefore, should be recognised only when it is actually received. Ld. AR further submitted that where there was no certainty of recovery of principal amount being non-performing assets, recognition of income thereon would not have been be proper. Therefore reality of situation has to be considered while recognising income from NPAs. Further income on sticky loans would not be taxable in hands of assessee in view of decision of Hon'ble Supreme Court in case of Godhra Electricity Supply Co. Ltd. v. CIT [1997] 225 ITR 746. assessee is following Accounting Standard 9, according to which income is to be recognised on receipt basis. He placed reliance on decision of Madras High Court in case of CIT v. Annamalai Finance Ltd. [2005] 275 ITR 451, wherein their Lordships had at page 459 observed that change of method of accounting of overdue charges from mercantile basis to cash basis, method of accounting as followed by assessee does not create any income but; method of accounting only recognises income. Therefore, either to apply accrual system or cash system, recognition of income is paramount factor. He also placed reliance on Tribunal decision in case of TCI Finance Ltd. v. Asstt. CIT [2004] 91 ITD 573 (Hyd.), wherein it has been held that accounting policies mandated by Reserve Bank of India are not contrary to accounting standard notified by Central Government in pursuance to section 145(2) of Act. assessee is following system of accounting from 1992-93 and since income has not accrued on sticky loans as per Reserve Bank of India guidelines, same is not liable to be taxed. 4. He also placed reliance on decision of ITAT Delhi Bench 'B' in case of TEDCO Investment & Financial Services (P.) Ltd. v. Dy. CIT [2003] 87 ITD 298 wherein it has been held (i) that provisions of Chapter III-B of RBI Act, 1934, override provisions of section 145(2) of Act because of non obstante clause appearing in section 45Q; (ii) that Income-tax Act, 1961, is General Act, whereas Reserve Bank of India Act is Special Act; (iii) that it was not case of department that there was excess delegation of power. Therefore, provisions of Reserve Bank of India Act would override provisions of Income-tax Act. 5. He further submitted that in assessment years 1993-94 and 1994-95, Hon'ble Madras High Court has decided case in favour of assessee. Since there is no change in method of accounting as compared to earlier years assessee's case is covered by jurisdictional High Court. Therefore, assessee was justified in not recognising income on NPAs. 6. Alternatively, it was argued that amount advanced to various parties represents stock-in-trade (money) in hands of assessee. If contention of assessee is not accepted amount of interest should be treated as deemed to have been written off in view of decision in CIT v. Srivinayaga Pictures [1986] 161 ITR 65 (Mad.). 7. On other hand Shri Shaji P. Jacob, Sr. Departmental Representative submitted that Reserve Bank of India Guidelines could not override mandatory provision of section 145 of Act. Referring to legislative intention for inserting section 43D, he submitted that Finance Act, 1991, inserted special provision with effect from 1-4-1991, for recognition of income in case of public financial institution, scheduled bank, State Financial Corporation, State Industrial Investment Corporation etc. Later on through Finance Act, 1999, benefit of this provision was extended to public companies engaged in providing long-term finances to housing projects as approved by National Housing Bank. Further he submitted that if Guidelines issued by Reserve Bank of India could suo motu overrule, specific provision of section 145 of Income-tax Act, 1961, there was no need of introducing section 43D by Finance Act, 1991 and later on modify it by extending benefit to some more class of assessees by Finance Act, 1999. This exhibits present situation under which Banks and public financial institutions take advantage of this provision with effect from 1-4-1991 and public companies engaged in providing long-term finances to housing projects with effect from 1-4- 2000 through Finance Act, 1999, whereas NBFCs take advantage of this provision without any Finance Act/amendment to Income-tax Act/any specific provision in Income-tax Act to that effect. This is clear anomaly and defeats purpose of legislation. 8. He further submitted that section 145 is specific provision which deals with method of accounting for determining income of particular year. Section 45Q of Reserve Bank of India Act, being general provision cannot override specific provision. He relied on decision of Hon'ble Supreme Court in case of South India Corpn. (P.) Ltd. v. Secretary, Board of Revenue AIR 1964 SC 207 p. 215. Further compulsive provision will control discretionary provision as held in Life Insurance Corpn. of India v. S.V. Oak AIR discretionary provision as held in Life Insurance Corpn. of India v. S.V. Oak AIR 1965 SC 975 p. 980. He further submitted that both Income-tax Act and Reserve Bank of India Act are Special Acts. There is no inconsistency/anomaly between Income-tax Act and Reserve Bank of India Act because both of them operate in different fields. Sometimes one finds two or more enactments operating in same field and each containing non obstante clause stating that its provisions will have effect 'notwithstanding anything inconsistent therewith contained in any other law for time being in force'. conflict in such case is resolved on consideration of purpose and policy underlying enactments and language used in them (Sarwan Singh v. Kasturilal AIR 1977 SC 265 pp. 274, 275; Ashoka Marketing Ltd. v. Punjab National Bank AIR 1991 SC 855 pp. 878, 879). Section 145 introduced by Finance Act, 1995 and Reserve Bank of India Guidelines were issued on 9-1-1997 which as far as recognition of taxable income in hands of NBFC is concerned, amounts to repeal of earlier Act by implication. This is against article 143 of Constitution of India. Repeal, express or implied, cannot be delegated either by Parliament or by State Legislature (Article 143 of Constitution of India and Delhi Laws Act, 1912, In re AIR 1951 SC 332). 9. Another argument put forward by Shri P. Jacob is that mandatory provisions cannot be overruled by Reserve Bank of India Guidelines. Section 1 4 5 uses word 'shall' which mandates method of accounting for all taxable entities in country whereas Reserve Bank of India issue only guidelines which are directory in nature. If provision is mandatory, act done i n breach thereof will be invalid, but if directory, act will be valid although non-compliance may give rise to some other penalty if provided by Statute (Rani Drigraj Kuer v. Raja Sri Amar Krishna Narain Singh AIR 1960 SC 444 pp. 449, 451; Union of India v. Tulsiram Patel AIR 1985 SC 1416). Ld DR further drew our attention to preamble of Reserve Bank of India Act, 1934 which reads as under: whereas it is expedient to constitute Reserve Bank of India to regulate issue of bank notes and keeping of reserve with view to securing monitary stability in (India) and generally to operate currency and credit system of country to its advantage'. Thus he submitted that introducing of Reserve Bank of India Act was never to determine taxable income of any entity in country for which self-contained code by itself i.e., Income-tax Act, 1922 was in place. heading given in section 45JA is 'Power of bank to determine policies and issue direction'. Further heading of Chapter III-B of Reserve Bank of India Act, which contains this section, is 'Provision relating to Non-Banking Institutions recurring deposits and Financial Institutions'. He therefore submitted that contents of this section have to be restricted to this extent. Reserve Bank of India Guidelines can only formulate policy of NBFC and to control its functions. bank may issue directions in public interest or regulate financial system of country to its advantage. It cannot determine extent of taxable income as per Income-tax Act. heading is akin to preamble. It specifies context in which contents thereunder refer. It throws light to design and intent of legislation. 10. He further submitted that principle of 'casus omissus' cannot be applied to provision of section 43D to allow benefit of recognition of income. There is no scope for imposing into statute words which are not there. Such importation would be, not to construe, but to amend statute. Even if there be 'casus omissus', effect can be remedied only by legislation not by financial interpretation. intention of Legislature is to be primarily gathered from words used in statute. Once it is shown that case by assessee comes within letter of law, he must be taxed, however, great hardship may appear to judicial mind to be. He relied on following decisions to support his view. Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC); CWT v. K.S. Vaidyanathan [1985] 153 ITR 11 (Mad.); Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC); Asstt. CIT v. Velliappa Textiles Ltd. [2003] 263 ITR 550 (SC); Prakash Nath Khanna v. CIT [2004] 266 ITR 1 (SC). He further submitted that fiscal statutes ought to be strictly construed does He further submitted that fiscal statutes ought to be strictly construed does not rule out application of principles of reasonable construction to give effect to purpose or intention of any particular provision as apparent from scheme of Act. In support of his contention he placed reliance on decision of Hon'ble Supreme Court in case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585. Further relying on decision of Hon'ble Supreme Court in case of C.W.S. (India) Ltd. v. CIT [1994] 208 ITR 649 he submitted that object of all rules of interpretation is to give effect to object of enactment having regard to language used. Where literal interpretation leads to absurd or unintended result, language of statute can be modified to accord with intention of Parliament to avoid absurdity. He also placed reliance on decisions of Hon'ble Supreme Court in cases of CIT v. J.H. Gotla [1985] 156 ITR 323; K.P. Varghese v. ITO [1981] 131 ITR 597 wherein it had been observed that purpose for which statute is enacted is relevant. 11. Ld. DR replying to reliance placed by Ld. AR of assessee o n decision of various ITAT submitted that in case of TEDCO Investment & Financial Services (P.) Ltd. (supra) submitted that in this case Tribunal went by presumption that Income-tax Act is General Act and RBI Act being Special Act, will override provisions of General Act i.e., Income- tax Act. Since this presumption itself is wrong, whole basis of order and analysis on basis of such mistaken assumption is against law. Another reasoning in this order is that assessee did not obtain Registration from RBI as NBFC when Assessing Officer and CIT(A) considered assessment and appeal and since it has obtained registration by time ITAT took up matter, Tribunal held that findings/reasoning of Assessing Officer and CIT(A) were not correct. This situation does not exist here and thus decision is distinguishable. Further, in this order Tribunal relied on decision in Overseas Sanmar Financial Ltd. v. Jt. CIT [2003] 86 ITD 602 (Chennai) which pertains to assessment years 1995-96 and 1996-97 and are prior to amendment to section 145 deleting hybrid system of accounting. In case of Overseas Sanmar Financial Ltd. (supra) Tribunal went by reasoning that since RBI and Income-tax Department are both part of same Finance Ministry of India, Guidelines issued by RBI are binding on Income-tax Department. ITAT never went into crucial issue as to whether Guidelines issued by RBI being delegated legislation, can overrule express provisions of Act i.e., section 145 of Income-tax Act. Further, this decision pertains to assessment years 1995-96 and 1996-97 i.e., prior to amendment to section 145 deleting hybrid system of accounting. 12. He further placed relevance on decision in case of Bank of Rajasthan Ltd. v. IAC [1999] 68 ITD 69, wherein ITAT, Bench Jaipur observed as under: Income-tax Act, 1961, is independent code in itself. Total income or loss to be computed has to be in accordance with provisions of Income- tax Act. Procedure to be followed for completion of assessment and total income to be computed has been elaborately certified in Income-tax Act itself. We are, therefore, of conformed opinion that for computation of total income under Income-tax Act, norms and/or procedure laid down by RBI cannot be followed under Income-tax Act. norms and various procedures prescribed by RBI to its subsidiary or scheduled banks is in order to regulate effectively conduct business and to control mandatory aspect of company.' Also submitted that in case of Dy. CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD17 (ITAT, SB - Hyd.) held as under: term 'accrual' of income used in Companies Act, as explained in t h e various Accounting Standards and as understood for purposes of taxation laws in certain circumstances may have different meanings depending on purpose of legislation, context in which such expression has been used and on interpretation of terms of relevant contracts. For tax purposes, accrual or receipt of income in relevant previous year will have to be determined in consonance with ambit of taxable income as per section 5 of Act on basis of careful scrutiny of terms of contract for hire purchase and lease agreements regardless of method of accounting followed by assessee for recognition of such income on its books of account.' He also relied on unreported decisions of Madras High Court in case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. v. Jt. CIT [2006] 280 ITR 491 and in case of Southern Technologies Ltd. v. Jt. CIT [T.C. No. 1 of 2002, dated 23-1-2002] wherein Hon'ble Jurisdictional High Court upheld findings of CIT(A) to extent that RBI directions cannot override mandatory provisions of Income-tax Act. 13. We have heard both parties and perused records. assessee is Non-Banking Finance Company and is required to follow prudential norms issued by Reserve Bank of India. In view of Reserve Bank of India norms, argument of ld. AR of assessee, Shri Vijayaraghavan is that assessee being NBFC is bound to follow Reserve Bank of India Guidelines for income recognition. interest income on NPAs is to be recognised on receipt basis and not on accrual basis. Whereas according to ld. DR Shri Shaji Jacob, section 145 of Income-tax Act, being specific provision would override provisions of section 45Q of Reserve Bank of India Act. 14. In order to decide issue whether RBI Guidelines would override income-tax provisions or not, we have to go through reasons for issue of RBI Guidelines. Reserve Bank of India issued prudential norms for income recognition, transparency of accounts, provisioning for bad and doubtful debts etc., vide letter dated 13-6-1994. These guidelines were issued on recommendations of working group on financial companies (Shah Working Group). Section 45JA of Reserve Bank of India Act was inserted by Act 23 of 1997 with retrospective effect from 9-1-1997 [The President of India promulgated t h e Reserve Bank of India (Amendment) Ordinance 1997, on 9-1-1997 as Parliament was not in session]. Reserve Bank of India issued prudential norms vide notification No. DFC 119/DG/(SPT)-98, dated 31-1-1998. This Notification replaced earlier Notification No. DFC 115/DG(SPT)/98, dated 2-1-1998. Prior to notification dated 2-1-1998, Guidelines issued by Reserve Bank of India vide letter dated 13-6-1994 based on recommendations of Shah Working Group on Financial Companies was in existence. Therefore, for assessment year 1997-98 which is under consideration guidelines issued under section 45JA are not applicable because they came into operation on 2-1-1998. As per Guidelines of Reserve Bank of India dated 13-6-1994, Non-Performing Asset (NPA) is asset in respect of which interest has remained unpaid and has become 'past due'. amount is to be treated as 'past due' when it remains unpaid for 30 days due'. amount is to be treated as 'past due' when it remains unpaid for 30 days beyond due date. interest on NPAs should not be booked as income if such interest has remained outstanding for more than six months on and from 31-3-1995. Reserve Bank of India Guidelines also prescribes norms for identification as bad and doubtful and writing of in books of account. Classifications of assets as per Reserve Bank of India Guidelines are as under: (a)Standard assets - Assets in respect of no default in payment of principal or payment of interest is perceived which does not disclose any problems nor carry more than normal risk attached to business. (b)Sub-standard assets - Sub-standard asset is one when has been classified as NPA for period not exceeding two years. Term loans where interest and or instalments of principal are over due for six months as on 31-3- 1995 should be treated as sub-standard. (c)Doubtful debt - doubtful asset is one which has remained NPA for period exceeding two years. Term loans where instalments of principal have remained overdue for period exceeding two years should be treated as doubtful. (d)Loss assets - asset which is considered uncollectible although there may be some salvage value or recovery value. Reserve Bank of India Guidelines also prescribed guidelines for provisioning of bad and doubtful debts as under: (i) Loss assets - entire asset should be written off. If assets are permitted to remain in books for any reason, 100 per cent of outstanding should be provided for. (ii)Doubtful debts - (a) 100 per cent of provision to extent of which advance is not covered by reasonable value of security to which NBFC has valid recourse should be made. realisable value is to be estimated on realistic basis. (b) Over and above item (a) above, depending upon period for which asset has remained doubtful, provision to extent 20 per cent to 50 per cent of secured portion (i.e., estimated realisable value of outstanding should be made on following basis: Period for which asset has been considered as doubtful %of provision (a) Up to one year 20% (b) One to three years 30% (c) More than three years 50% (iii) Sub-standard assets - general provision of 10 per cent of total outstanding should be made. Guidelines issued under section 45JA are also identical to guidelines mentioned above. From guidelines issued it is apparent that they were issued to supervise and exercise control on NBFCs and not to recognise income or make provisions for bad and doubtful debts for purposes of income-tax. 15. Chapter III-B containing provisions relating to NBFCs was inserted i n Reserve Bank of India Act, 1934 by Amendment Act 55 of 1963 - Statement of objects and reasons read as under: existing enactments relating to banks do not provide for any control over companies or institutions which although they are not treated as banks, accept deposits from general public or carry on other business which is allied t o banking. For ensuring more effective supervisions and management of monetary and credit system by Reserve Bank, it is desirable that Reserve Bank should be enabled to regulate conditions on which deposits may be accepted by these non-banking companies or institutions. Reserve Bank should also be empowered to give to any financial institution or institutions directions in respect of matters, in which Reserve Bank as Central Banking Institution of economy may be interested from point of view of control of credit policy. Reserve Bank powers in relation to commercial banks should also be enhanced and extended in certain directions, so as to provide for stricter supervision of operations and working of such banks. Bill seeks to achieve these objectives.' Section 45JA was inserted by Amendment Act 23 of 1997 -Statement of objects and reasons read as under: activities of non-banking institutions and unincorporated bodies receiving deposits are regulated in terms of provisions of Chapters III-B and III-C of Reserve Bank of India Act, 1934, respectively. Until recently emphasis was on regulating receipt of deposits by Non-Banking Finance Companies (NBFCs) as adjunct to credit and monetary policies and to provide indirect protection to depositors. However, experience has shown that provisions were neither sufficient to regulate business activities of these companies or do they provide adequate protection to depositors. Joint Parliamentary Committee which enquired into irregularities in securities and banking transactions had recommended that Government should examine whether legislative framework for regulating NBFCs is sufficiently wide. Working Group on Financial Companies appointed by Reserve Bank of India (RBI) under Chairmanship of Dr. A.C. Shah had suggested regulatory and control measures to ensure healthy growth and operations of these companies. Despite [provisions before promulgation of Reserve Bank of India (Amendment) Ordinance, 1997] contained in Chapter III-C of Reserve Bank of India Act, unincorporated bodies circumvented statutory restrictions by floating different partnership firms as and when firm reached level of 250 depositors. Further, it is reported that several unincorporated bodies were advertising aggressively through various media soliciting deposits from public by offering high rates of interest and other incentives. Reserve Bank of India (Amendment) Ordinance, 1997, further to amend Reserve Bank of India Act, provides several safeguards for NBFCs so as to ensure their viability. These include compulsory registration of NBFCs with Reserve Bank of India (RBI), stipulation of minimum net owned funds requirement, creation of reserve fund and transfer of certain percentage of profits every year to fund and prescription of liquidity requirement. RBI has also been vested with powers to issue guidelines encompassing aspects such as income recognition, accounting standards, provision for bad and doubtful debts, capital adequacy, etc., which are intended to ensure sound and healthy operations and quality of assets of these companies. RBI is also being empowered to issue directions to auditors of NBFCs, to order special audit of NBFCs, prohibit acceptance of deposits by NBFCs, and to make application for winding up of NBFCs. Whereas earlier only recourse available to depositor was to approach to Court of Law for redressal of grievances, powers have been vested with Company Law Board for directing defaulting NBFCs to make repayment of deposits/interest with view to protect interests of depositors. un-incorporated bodies have been totally prohibited from accepting deposits for purpose other than for personal use. They have been permitted to continue to take deposits after incorporating themselves within regulatory framework. unincorporated bodies have also been specifically prohibited from issuing any advertisements in any form. There are reports of several finance companies and unincorporated bodies having failed to repay deposits collected from unsuspecting depositors who have been tempted by attractive returns and incentives offered. Concern has been expressed in several quarters on need to take urgent steps to regulate activities of such companies and unincorporated bodies.' 16. plain reading of statement of objects and reasons for insertion of Chapter III-B relating to NBFCs and section 45JA makes it clear that legislative intention was for effective supervision and management of monetary and credit system by Reserve Bank of India. Having dealt with legislative intention of inserting Chapter XIII-B and section 45JA relating to NBFCs in RBI Act, 1934, issue to be decided is whether there is any inconsistency between section 145 of Income-tax Act and Guidelines issued by Reserve Bank of India. In other words whether due to non obstante clause in section 45Q of Reserve Bank of India Act, 1934, Guidelines issued by Reserve Bank of India Act, 1934, shall override provision of section 145 of Income-tax Act. In order to determine this issue we have to examine:- (a)The nature of Income-tax Act and Reserve Bank of India Act, whether Special Act or General Act. (b)Whether they operate in same field. (c)If there is any inconsistency, how to resolve same. 17. classification of statute whether General statute or Special statute has to be made with reference to context in each case and subject-matter dealt with by each statute. As Justice Ramesan has pointed out in Gunepally Thammayya v. Rajah Tyadapasupati Khandendu Dora AIR 1930 Mad. 963, most Acts can be classed as General Acts from one point of view and Special Act from another. For example it may be argued as he says that Contract Act which is applicable to all is general in relation to Labour Act which is limited to relationship of employer and employees; and in another sense Labour Act which applies to all concerned will be general in relation to labour employed in concerns engaged in supplies as essentials. 'General Act' prima facie, is that which applies to whole community. In natural meaning of term it means Act of Parliament which is unlimited both in its area and as regards individual, in its effects. special law must be taken as extensive in subject it enacts. Therefore, Income-tax Act is Special Act which is code in itself with regard to chargeability of income to tax, collection and recovery, appellate procedures, penalties and prosecutions etc., whereas RBI Act which deals with monetary system of country is general in relation to Income-tax Act. Reserve Bank of India Act is Special Act, for purpose of banking regulations and Income-tax Act is General Act with reference banking activities. Thus sections 5 and 145 of Act which define scope of income and computation of income are special provisions for taxation purposes with relation to RBI guidelines. 18. We in foregoing paragraphs have discussed legislative intention of inserting Chapter XIII-B relating to NBFCs in RBI Act, 1934. Section 45JA was also inserted with effect from 9-1-1997 for effective supervision and management of monetary and credit system of country. preamble n d heading are akin. Both preamble to RBI Act, 1934 and heading to Chapter III-B and section 45JA specify field to which they relate. Whereas preamble to RBI Act defines role of RBI for purpose of issue of bank notes, keeping of reserve with view to securing monetary stability in India and generally to operate currency and credit system of country to its advantage. Heading to section 45JA suggests that purpose of insertion of section 45JA was to empower bank to determine policies and issue directions relating to NBFCs. Heading to Chapter III-B also suggests purpose o r objectives to be achieved. Thus from preamble and headings it can be made out that RBI Act operates in field of monetary and credit system of country. It was never intended for recognition of income for purposes of Income-tax Act. Thus both Reserve Bank of India Act and Income-tax Act operate in different fields and they stand for different and distinct purposes. In case of Damodaran v. State AIR 1960 Ker. 58, 60 Hon'ble Kerala High Court observed that when purposes intended to be served are distinct and different and two provisions can very well stand together whatever be their validity, there is no disharmony between them, and therefore, no scope for applying principles of harmonious construction. Both Income-tax Act and RBI Act operate in different fields without disobeying each other, can stand together. Hence there can be no inconsistency in provisions. question of harmonious construction of provisions would arise when provisions operates in same field. 19. As per Reserve Bank of India Act, income on NPAs is not to be credited to profit and loss account. In case of asset if interest is not received for six months it is to be treated as NPA assessee had not credited income to profit and loss account following Reserve Bank of India Guidelines. As we have already held that Reserve Bank of India Guidelines are for purpose of supervision, management and control of monetary and credit system it would not stop accrual of income under section 5 of Income-tax Act. If Reserve Bank of India Guidelines were to stop accrual of income under section 5 of Act, it would have mentioned so. Thus Reserve Bank of India Guidelines dated 13-6- 1994 or issued subsequently under section 45JA cannot override Income-tax Act which is Special Act and Reserve Bank of India is General Act in relation to Income-tax Act. 20. We would like to mention that prior to insertion of section 43D with effect from 1-4-1991, recognition of income was on basis of Circular of 9-10- 1984. It said that for first three years income may be taken on accrual basis and from 4th year onwards, income in respect of doubtful debts was to be recognised on receipt basis. This principle was approved by Hon'ble Supreme Court in case of UCO Bank v. CIT [1999] 237 ITR 889. Since income was to be assessed for first three years on accrual basis provisions of section 4 3 D were inserted in Act. Circular No. 621, dated 19-12-1991 gives legislative intention stating that section 43D was inserted with view to improving viability of banks, public financial institutions etc. so as to provide that interest on sticky loans shall be charged to tax only in year in which interest is actually received or credited to profit and loss account. This benefit was extended with effect from 1-4-2000 in case of public companies engaged in long-term financing of housing projects approved by National Housing Bank. Legislature in their wisdom did not extend same benefit to NBFCs which has been given to scheduled banks, public financial institutions etc. provisions of section 43D as stood at relevant time (for assessment year 1997-98) had expression 'the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to guidelines issued by Reserve Bank of India in relation to such debts'. This expression continues to exist in newly substituted section 43D applicable with effect from 1-4-2000. This shows that Reserve Bank of India Guidelines in respect of scheduled banks, public financial institutions etc. were not sufficient for recognition of income on cash basis for purposes of Income-tax. income of such assessees was determined as per Circular dated 9-10-1984. Because of this reason section 43D was inserted in statute. Reserve Bank of India Guidelines in case of NBFC are for purpose of control and supervision with respect to public interest and viability of NBFC. guidelines never intended for taking interest income accrued as per section 5 of Act out of scope of Income-tax Act. If contention of assessee is accepted, it would amount to insertion of 'NBFC' in section 43D of Act, that too by guideline issued for different purposes by authority other than Parliament. In other words doctrine of 'Casus Omissus' will deem to have been applied which is contrary to law of land as propounded by Hon'ble Supreme Court in cases relied upon Ld. DR. (i) Smt. Tarulata Shyam's case (supra) (ii)K.S. Vaidhyanathan's case (supra) (iii)Padmasundara Rao's case (supra) (iv)Velliappa Textile Ltd.'s case (supra) (v)Prakash Nath Khanna's case (supra) From above discussion, it is clear that Reserve Bank of India guidelines alone are not sufficient for recognition of income on cash basis for purpose of income-tax. There has to be provision similar to section 43D in case of NBFCs also. 21. next contention of assessee is that it has not recognised income as there was no certainty of recovery of interest when principal amount was doubtful of recovery. assessee is engaged in business of money lending. When principal amount becomes bad, such amount along with interest can be written off as bad debts in books of account and assessee can claim deduction under section 36(1)(vii) of Act. This contention of assessee is not acceptable. 22. next argument of Shri Vijayaraghavan, ld. AR of assessee is that Reserve Bank of India guidelines are identical to regulations made under Sick Industrial Companies (Special Provisions) Act, 1985 ('SICA'). According to Ld. AR decisions taken under guidelines issued under SICA are binding on all authorities and they override provisions of Income-tax Act also. We have gone through provisions of Sick Industrial Companies (Special Provisions) Act, 1985. Under section 19 read with regulation 34, scheme providing for financial assistance to sick industrial company by way of loan, advances, guarantees, reliefs, concessions or sacrifices from Central Government, State Government, any Scheduled or other Bank, public financial institution or State level institution or any institution or other authority shall be sanctioned by Board with consent of Government, Bank, Institution or other authorities. Sub-rule (2) provides that Board (BIFR) shall circulate to every concerned person required by scheme to give his consent within stipulated time. In case, where consent of person is not received Board may adopt other measures including winding up of industrial company. Act also provides for appeal in case someone is aggrieved. Thus from plain reading of provisions of SICA, it is clear that concessions or sacrifices required by Government or any other person are related to rehabilitation of sick company and concerned persons are given opportunity to give their consent. Whereas Reserve Bank of India Guidelines have been issued for purpose of monitoring financial and credit system and also to watch interest of public and also safeguard viability of NBFCs. Under RBI Guidelines, opportunity is not given to income-tax authorities for simple reason that such guidelines are not intended to regulate Income-tax laws. Under SICA once scheme is approved with consent of Income-tax Department, recovery of tax demand cannot be affected. However it does not stop determination of tax liability. Therefore, two schemes under SICA and RBI Act are not comparable. assessee fails on this count also. 23. next argument of ld. AR is that assessee has been following system of accounting continuously under which interest income on NPAs was not recognised. In assessee's own case Hon'ble Madras High Court has upheld claim of assessee for earlier assessment years vide TC Nos. 774 and 349 of 2004. In this regard it is worth noting that from assessment year 1997-98 and onward, assessee has to follow either mercantile or cash system of accounting. assessment year in which Hon'ble Madras High Court has decided matter in favour of assessee pertains to prior to assessment year 1997-98, where assessee could follow hybrid system of accounting. Therefore, decision of Hon'ble Madras High Court in assessee's own case will not be applicable for assessment year 1997-98. Admittedly assessee is following mercantile system of accounting and therefore assessee was required to credit income accrued on non-performing assets to profit and loss account. Accordingly, we do not find any force in submission of ld. AR of assessee. 24. Further it has been submitted that when there was uncertainty of 24. Further it has been submitted that when there was uncertainty of recovery, concept of real income is to be applied and therefore, no income has accrued to assessee in view of decision of Hon'ble Supreme Court in case of Godhra Electricity Co. Ltd. (supra). This contention of assessee cannot be accepted. Hon'ble Supreme Court in case of United Commercial Bank v. C I T [1999] 240 ITR 355 held that concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognised limits. Reserve Bank of India has issued guidelines not only in case of NBFCs but also in case of banks. banks were crediting interest on bad and doubtful debts to sticky loan accounts but interest accrued on such assets was not credited to profit and loss account. Prior to insertion of section 43D, such interest was assessed to tax as required by Circular dated 9-10-1984. Since assessee is following mercantile system of accounting, interest has accrued on NPAs. Merely because RBI has issued Guidelines, it will not be proper to hold that interest has not accrued. 25. Ld. AR also submitted that decision of Hon'ble Madras High Court relied upon by revenue in case of TN Power Finance and Infrastructure Development Corpn. Ltd. (supra) is not direct on issue and therefore will not be applicable to facts of assessee's case. In this case Hon'ble Madras High Court has held that Reserve Bank of India Guidelines cannot override mandatory provisions of Income-tax Act. ratio of this decision is squarely applicable in respect of mandatory provisions of section 145 of Act. We are unable to accept this proposition. We are also unable to agree with him that Reserve Bank of India Guidelines are in line with accounting standards issued under section 145(2) of Act. accounting standard recognises income either on receipt basis or on mercantile basis regularly employed by assessee. If Reserve Bank of India Guidelines are accepted it would result into hybrid system of accounting which is not permissible after 1-4-1997. 26. Further regarding issue raised by ld. DR on delegated legislation, it has been submitted by Shri Vijayaraghavan, ld. AR of assessee that both Acts are by Parliament and therefore it is incorrect on part of revenue to say that Reserve Bank of India Guidelines will not override Income-tax Act. Ld. DR on other hand submitted that if contention of ld. AR is accepted it would amount to amendment of Income-tax Act by authority other than Parliament and is against provisions of article 143 of Constitution. Under article 143 of Constitution, it is settled law that Parliament cannot abdicate or delegate its legislative functions to outside authority. In view of foregoing discussions, we are in agreement with submissions made by ld. DR that Reserve Bank of India Guidelines cannot override law made by Parliament. Assessee has also placed reliance on decision of ITAT Delhi Bench 'B' in case of TEDCO Investment & Financial Services (P.) Ltd. (supra), wherein it has been held that Income-tax Act is General Act and RBI Act is Special Act. We after examination of nature and field of operation of both Acts have held that Income-tax Act is Special Act and RBI is General Act. Thus guidelines issued under section 45JA of RBI Act are general to be followed by NBFCs. Moreover, Tribunal has relied on decision of ITAT Chennai in case of Overseas Sanmar Financial Ltd. (supra) which relates to assessment years 1995-96 and 1996-97, i.e. prior to amendment of section 145 deleting hybrid system of accounting. In this case ITAT never went into crucial issue as to whether Guidelines issued by RBI being delegated legislation, can overrule express provisions of Act, i.e., section 145 of Income-tax Act. Thus decisions of ITAT relied by assessee are distinguishable. 27. Under Income-tax Act income is to assessed as per provisions of section 5 and section 145. Provisions of section 145 are read as under: 145. (1) Income chargeable under head, 'Profits and gains of business o r profession' or 'Income from other sources' shall, subject to provisions of sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly employed by assessee. (2) Central Government may notify in Official Gazette from time to time accounting standards to be followed by any class of assessee or in respect of any class of income. (3) Where Assessing Officer is not satisfied about correctness or completeness of accounts of assessee, or where method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by assessee, Assessing Officer may make assessment in manner provided in section 144.' 28. Sub-section (1) contains word 'shall' which suggest that provisions of section 145 are mandatory in nature. According to section 145 with effect from 1-4-1997 income of assessee shall be computed either on cash or on mercantile system of accounting regularly employed by assessee. It cannot be on mixed system of accounting. Further section 5 of Act defines scope of total income which reads s under:5. (1) subject to provisions of Act, total income of any previous year of person who is resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; (c) accrues or arises to him outside India during such year: Provided that, in case of person not ordinarily resident in India within meaning of sub-section (6) of section 6, income which accrues or arises to him outside India shall not be so included unless it is derived from business controlled by in or profession set up in India. (2) ** ** ** 'The combined reading of provisions of sections 5 and 145 of Act shows that total income of assessee shall include income on basis o f system of accounting regularly employed by him. Section 5 of Act is enabling provision whereas section 145 is machinery section, which provides method of computation of income under head 'Profits and gains of business or profession' or 'Income from other sources'. Section 145 of Act is not only for purposes of recognition of income but also provide for method of computation of income under specified heads. Therefore, total income of assessee which has been either received or accrued shall be computed in accordance with provisions of section 145 of Act. Accounting Standards I & II under sub-section (2) of section 145 of Act, have been issued in consultation with Institute of Chartered Accountants of India. Therefore, once income which has accrued shall be included in total income. assessee cannot postpone income on receipt basis except in cases of assessee covered by provision of section 43D of Act. This view is supported by decision of Special Bench in case of Nagarjuna Investment Trust Ltd. (supra) wherein it has been held that: term 'accrual' of income used in Companies Act, as explained in t h e various Accounting Standards and as understood for purposes of taxation laws in certain circumstances may have different meanings depending on purpose of legislation, context in which such expression has been used and on interpretation of terms of relevant contracts. For tax purposes, accrual or receipt of income in relevant previous year will have to be determined in consonance with ambit of taxable income as per section 5 of Act on basis of careful scrutiny of terms of contract for hire purchase and lease agreements regardless of method of accounting followed by assessee for recognition of such income on its books of account.' 29. We may also like to say that guidelines issued by RBI are for identification of assets. No bank advances money unless adequate security and guarantee is obtained at time of advancing of loan. guidelines also prescribe for making provision for bad and doubtful debts. Such provisioning made by assessee is not allowable as deduction under section 36(1)(vii) of Act because of express words of Explanation to section. Hon'ble Madras High Court in case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. (supra) has held that merely because Reserve Bank of India had directed assessee to provide for non-performing assets, that direction could not override mandatory provisions of Income-tax Act contained in section 36(1)(viia) which stipulate deduction not exceeding 5 per cent of total income 36(1)(viia) which stipulate deduction not exceeding 5 per cent of total income only in respect of provision for bad and doubtful debts, which are predominantly revenue in nature or trade related and not for provision for non- performing assets, which are of predominately capital nature. If ratio of decision of Hon'ble jurisdictional High Court is applied to facts of case, provisions of section 145 being mandatory in nature cannot be overridden by Reserve Bank of India Guidelines. For moment, if it is considered that Reserve Bank of India Guidelines would override provisions of Income- tax Act, then in that situation accrual of income taken place as per provisions of section 5 of Income-tax Act and for purpose of computation of income, Assessing Officer will have to refer to Reserve Bank of India Guidelines. Such conclusion will be not only absurd but against all principles of law. 30. From above discussion it is clear that Income-tax Act, 1961 is Special Act. Reserve Bank of India Guidelines have been issued under delegated legislation for purpose of effective supervision and control of monetary and credit system. Reserve Bank of India Guidelines have not been issued to override mandatory provisions of section 145 of Act. This view is supported by decision of Hon'ble Madras High Court in case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. (supra), wherein it h s been held that Reserve Bank of India Guidelines cannot override mandatory provisions of section 36(1)(viia) of Act. In view of above discussions and decision of Hon'ble Madras High Court, it is held that RBI Guidelines will not override mandatory provisions of section 145 of Act. Since assessee is following mercantile system of accounting, interest income on NPAs will be assessed to tax on accrual basis. 31. alternative argument of ld. AR of assessee is that if contention of assessee for recognition of income on receipt basis is not accepted, amount of interest should be treated to have been written off. We are unable to accept this plea on ground that for claiming deduction under section 36(1)(vii) assessee has to actually write off bad debt in books of account, in view of decision of Hon'ble Madras High Court in case of CIT v. Micromax Systems (P.) Ltd. [2005] 277 ITR 409. 32. next issue for consideration relates to depreciation deemed to have been allowed in years in which income was computed under section 115J of Act. contention of assessee is that WDV of assets for purpose of depreciation remains undiminished by any depreciation not actually allowed within meaning of section 43(6) and therefore assessee's claim for depreciation amounting to Rs. 13,25,18,600 is allowable. We find that this issue is covered by decision of Hon'ble Supreme Court in case of Karnataka Small Scale Industries Development Corpn. Ltd. v. CIT [2002] 258 ITR 770, wherein it has been held that even where book profit liability is imposed, amounts of business loss, unabsorbed depreciation, investment allowance etc., at beginning of accounting year are to be adjusted and set off to same extent of such brought forward losses, unabsorbed depreciation, etc., as they would have been adjusted or set off had assessee been assessed to tax in regular way in accordance with provisions of sections 28 to 43 of Act, and only resultant amount of loss, unabsorbed depreciation, etc., can be carried forward to next year. Supreme Court further observed that all that section 115J(2) does is to preserve right to carry forward balance of unabsorbed loss and unabsorbed depreciation in relevant previous year to next year. Respectfully following decision of Hon'ble Supreme Court, issue is decided against assessee and in favour of revenue. Accordingly order passed by ld. CIT(A) is upheld on this issue. 33. next issue for consideration relates to expenditure for purchase of software claimed as revenue expenditure. Assessing Officer found that assessee purchased software and used in business of leasing and claimed same as revenue expenditure. claim as revenue expenditure was made on ground that software does not last long. contention of assessee w s rejected by Assessing Officer on ground that asset of enduring nature came into existence and therefore same was in nature of capital expenditure. claim of assessee was also rejected by ld. CIT(A) on ground that assessee leased out software along with hardware concerned and since assessee had received lease rentals in lease period for such composite lease of hardware and software, Assessing Officer was correct in disallowing expenditure as capital in nature. He however, directed Assessing Officer to allow depreciation on software as forming part of computer and its accessories. Before us, assessee has submitted that life of softwares is not for long period and therefore no asset of enduring nature has come into existence. On other hand ld. DR relying on decision of Hon'ble Rajasthan High Court in case of CIT v. Arawali Constructions Co. (P.) Ltd. [2003] 259 ITR 30, Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 ITAT Delhi. Jt. CIT v . Company Law Institute [IT Appeal No. 1752 (Mad.) of 2000] submitted that purchase of software was capital expenditure. 34. We have heard both parties. In this case assessee has leased out computer along with software. life of software is not short as held in case of Arawali Constructions Co. (P.) Ltd. (supra), Maruti Udyog Ltd.'s case (supra) and Company Law Institute's case (supra). Therefore, software purchased will be capital in nature. Accordingly we do not find any infirmity in order passed by authorities below. 35. next issue relates to change in method of accounting income on hire purchase transactions from Sum of Digits to Internal Rate of Return Method. W e find that this issue is covered by decision of Special Bench of ITAT, Hyderabad Bench, in case of Nagarjuna Investment Trust Ltd. (supra), wherein it has been held that SOD is appropriate method to determine income of hire purchase transactions. Respectfully following order of ITAT, Hyderabad Bench it is held that issue is covered against assessee and in favour of revenue. Accordingly, we do not find any infirmity in orders passed by authorities below. 36. last issue for consideration relates to rejection of claims for provision of NPAs. assessee made provision on account of bad and doubtful debts following Guidelines issued by Reserve Bank of India. We find this issue is covered by decision of Hon'ble Madras High Court in case of Micromax Systems Ltd. (supra), wherein it has been held that for allowability of deduction under section 36(1)(vii), assessee is required to write off bad debts in books of account. Further Explanation to section 36(1)(vii) has been inserted with retrospective effect from 1-4-1989 according to which any bad debt or part thereof written off as irrecoverable in account of assessee shall not include any provision for bad and doubtful debts made in accounts of assessee. We also find that in case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. (supra), Hon'ble Madras High Court has held that merely because Reserve Bank of India had directed assessee to provide for non-performing assets, that direction could not override mandatory provisions of Income-tax Act contained in section 36(1)(viia), which stipulate deduction not exceeding 5 per cent of total income only in respect of provision for bad and doubtful debts, which are predominantly revenue in nature or trade related and not for provision for non-performing assets, which are of predominately capital nature. Respectfully following decision of jurisdictional High Court, it is held that provision made for bad and doubtful debts following Guidelines issued by Reserve Bank of India in respect of NPAs will not be allowable as deduction. 37. Now we will take Revenue's appeal in ITA No. 1978/Mds./2000. first issue for consideration relates to sales tax collected but not paid. Assessing Officer found that assessee was accumulating sales tax to contingency deposit and not offering amounts collected for purpose of income-tax. Assessing Officer brought sale tax amount to tax following decision of Hon'ble Supreme Court in case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542. ld. CIT(A) allowed claim of assessee following decision in case of Sundaram Finance Ltd. 38. Before us it has been submitted by ld. DR that assessee collected sales tax on certain hire purchase transactions. This was not paid to Government and instead kept as contingency account with assessee. amount was not offered as income on plea that matter was still in court and had not reached finality. He further submitted that this issue is covered by decision of Hon'ble Supreme Court in case of K.C.P. Ltd. v. CIT [2000] 245 ITR 421. Ld. AR on other hand relied on order of authorities below. 39. We have heard both parties. In case before us assessee has collected sales tax on certain hire purchase transactions. assessee has not deposited tax so collected but was credited to contingency account on ground that matter is pending in Court. We find that this issue is covered in favour of revenue by decision of jurisdictional High Court in case of CIT v. Southern Explosives Co. [2000] 242 ITR 107 (Mad.) wherein it has been held that amounts collected by assessee were amounts which were meant to be utilised by assessee for meeting its tax liability. Even if assessee had paid over entire amount received by it as deposits towards sales tax to State Government, it would still have been open to assessee to seek refund if assessee wishes to claim such refund on ground that tax had been levied at higher rate than rate permissible. fact that assessee had chosen to adopt device of labelling part of amounts collected towards its sales tax liability as deposit could not make difference. amount formed part of assessee's income, further in case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524, Hon'ble Supreme Court held that if receipt is trading receipt, fact that it not so shown in account books of assessee would not prevent assessing authority from treating as trading receipt. It is true nature and quality of receipt and not head under which it is entered in account books, which is decisive. Eventually if amount so collected is passed on to State Government or refunded to purchasers, assessee would not be entitled to claim deduction of sum so paid or refunded. ratio laid down by Hon'ble Supreme Court in case of Hindustan Housing & Land Development Trust Ltd. (supra) was applied while deciding issue in case of KCP Ltd. (supra). In this case assessee collected excess sugar price, which was not taken to profit and loss account. Hon'ble Supreme Court while upholding order of Hon'ble Andhra High Court held that amount was retained by assessee as price of sugar sold by it though right of assessee to realise amount was subject of dispute though excess amount was retained in separate account that would not make any difference. Merely maintaining separate accounting under heading given by assessee would not alter nature of receipt if it is actually trading receipt. Respectfully following decision of Hon'ble Madras High Court in case of South India Explosives Co. (supra) and decision of Hon'ble Supreme Court in KCP Ltd.'s case (supra), it is held that sales tax collected on hire purchase transaction was liable to be taxed as trading receipt. Accordingly ld. CIT(A) was not justified in deleting addition. We, therefore, set aside order of ld. CIT(A) and restore order of Assessing Officer on this issue. 40. next issue relates to higher rate of depreciation on leased vehicles. We find that this issue is covered against revenue and in favour of assessee by decision of Hon'ble Madras High Court in case of CIT v. Madan & Co. [2002] 254 ITR 445. Respectfully following decision of jurisdictional High Court, it is held that assessee is entitled for higher rate of depreciation on leased vehicles. Accordingly, we uphold order of ld. CIT(A) on this issue. 41. In result assessee's appeal is dismissed and revenue's appeal is partly allowed. *** JOINT COMMISSIONER OF INCOME TAX v. INDIA EQUIPMENT LEASING LTD.
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