An interesting question of law which arises for determination in
these Civil Appeals filed by Non-banking Financial Companies in the case of M/s Southern Technologies Ltd. -versus- Joint Commnr. of Income Tax,
Coimbatore Dt.11-01-2010 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?"
The assessee, a NBFC, made a ‘Provision for NPA’ in terms of the RBI Directions
1998. It claimed a deduction for the said provision u/s 36 (1)(vii) on the
ground that as it was debited to the P&L Account and reduced the profits, it was
a ‘write off’. In the alternative, it was claimed that there was a diminution in
the value of its assets for which a deduction u/s 37 as a trading loss was
eligible. It was also claimed that the RBI Directions overrode the I. T. Act.
The Tribunal allowed the claim but the High Court rejected it.
The RBI Directions issued u/s 45JA of the RBI Act provide that anticipated
losses must be taken into account but expected income need not be taken note of.
This is for ensuring that NBFCs state true and correct profits without
projecting inflated profits. These are prudential norms or disclosure norms but
have nothing to do with the computation or taxability of the provisions for NPA
under the IT Act. Further though the RBI Directions deviate from the accounting
practice as provided in the Companies Act, they do not override the provisions
of the IT Act. The RBI Directions 1998 and the IT Act operate in different
fields.
The “Provision for NPA” made in terms of the RBI Directions does not
constitute expense for purposes of s. 36(1)(vii). The said Provision is for
presentation purposes and in that sense it is notional.The argument that a provision for NPA under commercial accounting is not
“income” hence on the basis of “Real Income Theory” it cannot be added back has
no merit. Though profits have to be computed on commercial principles and on
real income basis, this is subject to the provisions of the Act. A provision for
NPA is only a notional expense. Further, under the Expl to s. 36(1)(vii) a
provision for doubtful debt is not allowable. For the same reason, deduction can
also not be claimed u/s 37 (1). The argument of the NBFCs that the non-grant of benefits u/ss 36 (1)(viia)
& 43D to NBFCs and confining such benefits to banks, SFCs, HFCs violates
Articles 14 & 19 of the Constitution has no merit. As regards Art 14, the
business operations of NBFCs and banks are quite different and they satisfy the
test of “rational and intelligible differentia” having nexus with the object
sought to be achieved. As regards Art 19 (1), keeping in mind the important role
assigned to banks in the economy and the fact that NBFCs are vulnerable to
economic and financial uncertainties, the restriction placed on NBFC by not
giving them the benefit of deduction satisfies the principle of “reasonable
justification”. Further, laws relating to economic activities should be viewed
with greater latitude than other laws.
The link for the full text of the
case law is given below :-
2010-ITS-34-SC-M/s
Southern Technologies Ltd. -versus- Joint Commnr. of Income Tax, Coimbatore
Dt.11-01-2010
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