Appeal details
Counselvise Citation
[2017] 127 COUNSELVISE.COM (IT) 2618 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 10 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
27-09-2017
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
08-08-2017
Assessment Year
2011-2012
Appeal Filed On
20-11-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER I.T.A. NO. 1316/HYD/2015 ASSESSMENT YEAR: 2011-12 M/S. BHARAT FINANCIAL INCLUSION LIMITED, (FORMERLY SKS MICROFINANCE LIMITED) HYDERABAD [PAN: AAICS2940J] VS THE ADDL.CIT, RANGE-3, HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.C. DEVDAS, AR FOR REVENUE : SMT. NIVEDITA BISWAS, DR DATE OF HEARING : 07-09-2017 DATE OF PRONOUNCEMENT : 27-09-2017 O R D E R PER INTURI RAMA RAO, A.M. : THIS APPEAL FILED BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-3, HYDERABAD, DATED 10-08-2015 FOR THE AY. 2011-12. THE APPELLANT R AISED THE FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE ADDITIONS AND/OR DENIAL OF CLAIMS AND DEDUCTIONS, BY THE CIT (APPEALS)-3, HYDERABAD, IS UNJUSTIFIED, ERRONEOUS AND UNSUSTAINA BLE BOTH ON FACTS AND IN LAW. 2. THE LEARNED CIT(APPEALS)-3, HYDERABAD, ERRED IN CONFIRMING THE DISALLOWANCE OF EMPLOYEE STOCK EXPENDITURE FOR RS. 2,10,56,905/- I.T.A. NO. 1316/HYD/2015 :- 2 - : 3. THE LEARNED CIT (APPEALS)- 3, HYDERABAD, ERRED I N CONFIRMING THE DISALLOWANCE OF PROVISION FOR STANDARD AND NON PERF ORMING ASSETS FOR RS. 52,59,85,047/- 4. THE APPELLANT DENIES IT'S LIABILITY TO THE LEVY OF INTEREST U/S. 234-B OF THE INCOME TAX ACT, 1961. 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME O F HEARING OF THE APPEAL. 2. BRIEFLY, FACTS OF THE CASE ARE THAT THE APPELLANT IS A COMPANY DULY INCORPORATED UNDER THE PROVISIONS OF COMPANIES A CT, 1956. IT IS ENGAGED IN THE FINANCIAL SERVICES SECTOR, PROVIDIN G MICRO FINANCE SERVICES TO RURAL POOR THROUGH JOINT LIABILITY GROUPS . THE RETURN OF INCOME FOR THE AY. 2011-12 WAS FILED DECLARING TOTAL I NCOME OF RS. 1,69,18,54,640/-. AGAINST THE SAID RETURN, ASSESSMENT WAS COMPLETED BY THE ADDL.CIT, RANGE-3, VIDE ORDER DT. 07 -03-2014 PASSED U/S. 143(3) OF THE INCOME TAX ACT [ACT] AT A TO TAL INCOME OF RS. 2,24,43,78,149/-. WHILE DOING SO, THE LD.AO DISA LLOWED THE CLAIM FOR DEDUCTION TOWARDS EMPLOYEE STOCK OPTION PLAN (ESOP) OF RS. 2,10,56,905/- AND THE CLAIM FOR DEDUCTION OF PROV ISION FOR STANDARD NON-PERFORMING ASSETS OF RS. 52,59,85,047/-. THE FACTS SET OUT BY THE LD.AO RELATING TO ESOP ARE AS UNDER: 3.1. EMPLOYEE STOCK OPTION PLAN (ESOP): THE ASSESSE E COMPANY PROVIDES ESOPS TO ALL ITS EMPLOYEES AND DIRECTORS AS AN INCE NTIVE TO ATTRACT, RETAIN AND REWARD THE EMPLOYEES WORKING WITH THE COMPANY. IN THE SCHEME OF ESOPS, THE EMPLOYEES ARE ALLOTTED STOCK OPTIONS AT THE BOOK VALUE OF EACH SHARE. HOWEVER, DEPENDING UPON THE PERFORMANCE' OF THE COMPANY, THE PRICE OF THE LISTED SHARES AT ANY POINT OF TIME MAY BE MUCH HIGHER THAN THE BOOK VALUE OF THE SHARE. WHEN AN EMPLOYEE EXERCISES HIS OPTION AND PROCURES THE SHARES OF THE COMPANY AT THE BOOK VALU E, THE COMPANY SUFFERS LOSS TO THAT EXTENT. THIS IS BECAUSE HAD THE SHARE BEEN ALLOTTED TO ANY OTHER PERSON, THE COMPANY WOULD HAVE GOT A MUCH HIGHER PR ICE SINCE THE MARKET PRICE OF THE SHARE IS HIGHER THAN THE BOOK VALUE. T HIS LOSS SUFFERED BY THE COMPANY IS IN TURN DEBITED TO THE SHARE PREMIUM ACC OUNT. THE ASSESSEE MAINTAINS A SEPARATE ESOP ALLOTMENTS FOR PASSING TH E RELEVANT ENTRIES. EVERY YEAR, CERTAIN AMOUNTS ARE PROVIDED IN THE ACC OUNTS TOWARDS ESOP ALLOTMENT (PURELY PROVISIONAL) AND THE SAME IS ADDE D BACK TO THE INCOME IN I.T.A. NO. 1316/HYD/2015 :- 3 - : THE COMPUTATION. ALL THE EMPLOYEES TO WHOM STOCK OP TIONS HAVE BEEN ALLOTTED MAY NOT EXERCISE THE OPTIONS DURING THE YE AR. THEREFORE, DEPENDING ON THE ACTUAL EXERCISE OF THE OPTIONS, THE LOSS SUF FERED BY THE COMPANY IS CALCULATED AND CLAIMED AS EXPENDITURE IN THE COMPUT ATION OF INCOME. 3.2. IT IS SEEN FROM THE COMPUTATION FOR THE CURREN T YEAR THAT THE ASSESSEE HAS ADDED BACK AN AMOUNT OF RS.4.93 CRORES AS 'ESOP EXPENDITURE DISALLOWED TO THE EXTENT OF OPTIONS NOT EXERCISED D URING THE YEAR'. FROM THE PROFIT AND LOSS ACCOUNT, IT IS OBSERVED THAT THE AC TUAL DEBIT TO THE PROFIT AND LOSS ACCOUNT IS AT RS.7.30 CRORES. THIS IMPLIES TH AT THE ASSESSEE HAS ADDED BACK THE ENTIRE PROVISION OF RS.7.30 CRORES A ND CLAIMED AN AMOUNT OF RS.2.10 CRORES WHICH IS THE AMOUNT OF LOSS SUFFE RED BY THE COMPANY ON ACCOUNT OF STOCK OPTIONS BEING EXERCISED BY THE EMP LOYEES. THE BALANCE AMOUNT OF RS.4.93 CRORES IS ADDED BACK IN THE COMPU TATION. THE ISSUE IS WHETHER THE EXPENDITURE OF RS.2.10 CRORES CLAIMED B Y THE ASSESSEE AS A DEDUCTION, IS ALLOWABLE IN THE COMPUTATION. THE ASS ESSEE SUBMITTED THAT THE LOSS SUFFERED BY THE COMPANY IS A REVENUE EXPEN DITURE SINCE ESOP IS AN INCENTIVE GIVEN TO THE EMPLOYEES WHICH IS ON PAR WITH ANY PERQUISITE OR REMUNERATION. HOWEVER, THE ASSESSEE'S CLAIM IS NOT ACCEPTABLE. WHILE REMUNERATION AND THE PERQUISITES FALL IN THE FIELD OF REVENUE EXPENDITURE, THE EXPENDITURE PERTAINING TO THE LOSS SUFFERED BY THE ASSESSEE ON ALLOTMENT OF SHARES IS DEFINITELY IN THE CAPITAL FI ELD. IN OTHER WORDS, IT IS IN THE PROCESS OF ALLOTMENT OF SHARES AND COLLECTING O F THE SHARE PREMIUM AMOUNTS THAT THE ASSESSEE HAS SUFFERED THE LOSS. IN THE CASES OF BROOKE BOND INDIA LTD VS CIT 225 ITR 798 (SC) AND CIT VS P UNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD 225 ITR 792 (SC), IT WA S CATEGORICALLY HELD BY THE APEX COURT THAT ANY EXPENDITURE INCURRED IN CON NECTION WITH THE SHARE CAPITAL OF THE COMPANY IS CAPITAL IN NATURE. THEREF ORE, THE EXPENDITURE CLAIMED BY THE ASSESSEE CANNOT BE ALLOWED AS A REVE NUE EXPENDITURE AND HENCE, AN AMOUNT OF RS.2,10,56,905/-, WHICH IS THE EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF ESOPS IS NOT ALLOWED AND THE SAME IS ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE, PEN ALTY PROCEEDINGS U/S. 271(1)(C) OF THE I.T.ACT, 1961 ARE INITIATED SEPARA TELY ON THIS ISSUE. ADDITION: RS.2,10,56,905/- 2.1. AS FAR AS PROVISION FOR STANDARD AND NON-PERFOR MING ASSETS AS UNDER: 4.1. PROVISION FOR STANDARD AND NON PERFORMING AS SETS: IT IS SEEN FROM THE SCHEDULE 19 OF THE PROFIT AND LOSS ACCOUNT THAT THE ASSESSEE HAS MENTIONED VARIOUS PROVISIONS AND WRITE OFFS. A SPECIFIC PROVI SION WAS MADE BY THE ASSESSEE TOWARDS 'STANDARD AND NON PERFORMING ASSET S' OF RS.52.59 CRORES. HOWEVER, THE SAID PROVISION WAS NOT ADDED B ACK IN THE COMPUTATION OF INCOME. THE ASSESSEE WAS ASKED TO CLARIFY WHY TH E SAID PROVISION WAS NOT ADDED BACK. THE ASSESSEE MADE A WRITTEN SUBMISS ION ON THE ISSUE, THE GIST OF WHICH IS REPRODUCED BELOW: I.T.A. NO. 1316/HYD/2015 :- 4 - : THE ASSESSEE IS AN NBFC ENGAGED IN THE BUSINESS OF MICRO FINANCE AND DURING THE FINANCIAL YEAR 2010-11, A MAJOR CRISES BROKE OUT IN AP STATE RESULTING IN AN ORDINANCE BEING ISSUED BY THE STATE GOVERNMENT ASSESSEE'S OPERATIONS WERE GREATLY RESTRICTED SINCE FRESH LOANS HAD TO BE APPROVED BY THE GOVERNMENT BEFORE ADVANCI NG THEM TO THE RURAL CLIENTELE, THE FIELD OPERATIONS WERE DISRUPTED IN MOST PART OF THE CENTERS AND THERE WAS DRASTIC FALL IN THE LOAN REPAYMENTS FROM THE EARLIER BORROWERS. ACCORD INGLY, THE COMPANY MADE A PROVISION OF RS.52.60 CRORES WHICH HAS RESULTED IN THE FIRST EVER LOSS SUFFERED BY THE COMPANY IN THE PAST SEVEN YEARS OF ITS EXISTENCE. 4.2. IT WAS SUBMITTED THAT MANY OTHER PLAYERS IN TH E SAME LINE OF BUSINESS HAD TO EVEN GO FOR A CORPORATE DEBT RESTRUCTURING S CHEME BECAUSE THE BANKS ALSO GREATLY REDUCED THEIR EXPOSURE TO MICRO FINANCE SECTOR. IT WAS SUBMITTED THAT THE ASSESSEE ALSO SUFFERED DURING TH E SAID PERIOD. THEREAFTER, THE COMPANY REFERRED TO THE RBI GUIDELI NES AND ALSO RELIED ON CERTAIN DECISIONS WHEREIN IT WAS HELD THAT A PROVIS ION SHOULD BE MADE TOWARDS DOUBTFUL ADVANCES AND THAT SUCH PROVISIONS MADE ARE DEDUCTIBLE UNDER THE ACT. IT WAS CATEGORICALLY PUT TO THE ASSE SSEE AS TO WHETHER ITS CLAIM ON THE SAID AMOUNT OF RS.52.59 CRORES WAS FOR GONE AND WHETHER THE SAME HAS BEEN WRITTEN OFF FROM BOOKS. THE ASSESSEE HAS CONFIRMED IN NEGATIVE. IN OTHER WORDS, THE ASSESSEE HAS NEITHER GIVEN UP ITS RIGHT TO RECEIVE THESE AMOUNTS NOR THE SAID AMOUNTS WERE ACT UALLY WRITTEN OFF FROM THE BOOKS. IT IS PURELY A PROVISION MADE BY THE ASS ESSEE IN ITS BOOKS FEARING THAT THE SAID QUANTUM OF AMOUNT MAY NOT BE REALIZED DURING THE YEAR. THEREFORE, THE ASSESSEE SHOULD HAVE ADDED BAC K THE SAID PROVISION IN THE COMPUTATION OF INCOME, MORE SO, BECAUSE IF A NY OF THESE AMOUNTS WERE NOT REALIZED IN THE SUBSEQUENT PERIOD, A SEPAR ATE DEDUCTION COULD BE CLAIMED UNDER THE HEAD 'BAD DEBTS'. THE HON'BLE APE X COURT IN THE CASE OF STATE BANK OF PATIALA VS CIT 219 ITR 706 HELD AS FO LLOWS: 'IF THE SUMS SET APART IN THE BALANCE SHEET ARE ONL Y 'PROVISIONS', THE ASSESSEE WILL NOT BE ENTITLED TO THE RELIEF CLAIMED BY IT.' 4.3. MERE SETTING ASIDE OF ANY AMOUNT DOES NOT AUTO MATICALLY MAKE IT ELIGIBLE FOR A DEDUCTION. THE LIABILITY SHOULD HAVE ACTUALLY OCCURRED IN VIEW OF WHICH A PROVISION COULD BE MADE. LIABILITY THAT IS TO BE ALLOWED IS THAT WHICH IS ACTUALLY EXISTING AT THE TIME. PUTTING ASI DE OF MONEY WHICH MAY BECOME EXPENDITURE ON THE HAPPENING OF ANY EVENT IS NOT EXPENDITURE. IT BECOMES AN EXPENDITURE ONLY WHEN THE LIABILITY BECO ME A 'FAIT ACCOMPLI' IN ANY ACCOUNTING YEAR. RELIANCE IS PLACED ON THE FOLL OWING DECISIONS : 1. M/S SHREE SAJJAN MILLS LTD VS CIT 156 ITR 585 (S C) 2. MYSORE LAMPS WORKS LTD VS CIT 185 ITR 96 (KAR) 3. INDIAN MOLASSES CO PVT. LTD VS CIT 37 ITR 66 (SC ) THE FACTS OF THE CASE ACE AKIN TO THE FACTS OF THE CASES EEPORTED ABOVE. THE ASSESSEE HAS MERELY SET ASIDE THE AMOUNTS FEARING T HAT THESE LOANS MAY NOT BE RECOVERABLE DURING THE YEAR. THE ORDINANCE I SSUED BY THE STATE GOVERNMENT DID NOT MAKE THE LOANS IRRECOVERABLE. TH E ORDINANCE ONLY I.T.A. NO. 1316/HYD/2015 :- 5 - : DIRECTED THAT THE GOVERNMENT SHOULD BE CONSULTED BE FORE ADVANCING THE LOANS, SO THAT THE LOANS REACH THE CORRECT (ELIGIBL E) PERSONS AND NOT THE GENUINE PERSONS. THE EXPOSURE BEING REDUCED BY THE BANKS WILL ONLY AFFECT THE ASSIGNMENT OF LOANS BY THE ASSESSEE TO THE BANK S. IT DID NOT RENDER IRRECOVERABLE THE LOANS ALREADY DISBURSED. CONSIDER ING THE SAME, THE PROVISION MADE FOR STANDARD AND NON PERFORMING ASSE TS OF RS.52.59 CRORES IS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. PENALTY PROCEEDINGS U/S 271(1)(C) OF THE I.T.ACT, 1961 ARE INITIATED SEPARATELY ON THIS ISSUE. ADDITION: 52,59,85,047/- AND ALSO DISALLOWED A SUM OF RS. 54,81,557/- TOWARD S ADVANCE GIVEN TO EMPLOYEES WELFARE TRUST. 3. BEING AGGRIEVED, APPELLANT PREFERRED AN APPEAL BE FORE THE CIT(A), WHO VIDE IMPUGNED ORDER HAD ALLOWED THE CLAI M TOWARDS THE ADVANCE GIVEN FOR EMPLOYEES WELFARE TRUST FOLLOWING THE ORDER OF THE HON'BLE TRIBUNAL IN ASSESSEES OWN CASE FOR EARL IER YEARS. 4. HOWEVER, AS REGARDS THE CLAIM FOR DEDUCTION OF ES OP, THE CLAIM CAME TO BE REJECTED BY THE CIT(A) HOLDING TO BE CAPITAL IN NATURE. 4.1. AS REGARDS THE CLAIM FOR PROVISION FOR STANDARD AND NON- PERFORMING ASSETS, THE LD.CIT(A) PLACING RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHN OLOGIES LTD., VS. JCIT [320 ITR 577] (SC) CONFIRMED THE DISAL LOWANCE. BEING AGGRIEVED, APPELLANT IS IN APPEAL BEFORE US I N THE PRESENT APPEAL. 5. IN THE PRESENT APPEAL, THE APPELLANT RAISED FIVE GRO UNDS OF APPEAL. OUT OF WHICH, GROUND NOS. 1, 4 AND 5 ARE GE NERAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. I.T.A. NO. 1316/HYD/2015 :- 6 - : 6. IN GROUND NO. 2, APPELLANT CHALLENGES IN CONFIRMI NG THE DISALLOWANCE OF ESOP OF RS. 2,10,56,905/-. 6.1. BEFORE US, THE LD.AR VEHEMENTLY CONTENDED THAT THIS ISSUE IS NO LONGER RES INTEGRA AS SPECIAL BENCH OF BANGALORE TRIBUNAL IN THE CASE OF M/S. BIOCON LTD., IN ITA 368/BANG/2010 AND O THERS DT. 16-07-2013 HELD THAT THE SAME IS ALLOWABLE EXPENDIT URE AND THIS DECISION WAS SUBSEQUENTLY FOLLOWED BY SEVERAL CO -ORDINATE BENCHES OF THE TRIBUNAL IN THE FOLLOWING CASES: I. CIT VS. PVP VENTURES LTD [211 TAXMAN 554] (MAD) (HC) ; II. BIOCON LTD [114 ITD 21], [251 ITR 602] (TRIB) (BANG) ; III. REDDY LABORATORIES LTD V. ADDL.CIT 30 ITR 393 (HYD) (TRIB) ; IV. BIOCON LTD (ITA 368/BANG/2010); V. APOLLO HEALTH STREET LTD V. DCIT (ITA 41/2014 AND 132/2014) (HYD); VI. S.S.I. LTD VS. DCIT [85 TTJ 1049] (CHENNAI); VII. ACIT VS. SPRAY ENGINEERING DEVICES LTD [53 SOT 70] (CHENNAI) 6.2. ON THE OTHER HAND, LD.DR PLACED RELIANCE ON THE DECISION OF THE CO-ORDINATE BENCH OF DELHI IN THE CASE OF RANBAXY LABORATORIES LTD., [ 124 TTJ 771] (DELHI) . 6.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND OF APPEAL IS WHETHER THE EXPENDITURE ON ESOP IS ALLOWABLE OR NOT? THIS ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE-COMPANY BY THE SPE CIAL BENCH OF BANGALORE TRIBUNAL IN THE CASE OF M/S. BIOCON LTD., I N ITA I.T.A. NO. 1316/HYD/2015 :- 7 - : 368/BANG/2010 AND OTHERS DT. 16-07-2013, WHERE IN THE SPECIAL BENCH HELD AS FOLLOWS: (I) THE DIFFERENCE (DISCOUNT) BETWEEN THE MARKET P RICE OF THE SHARES AND THEIR ISSUE PRICE IS 'EXPENDITURE' IN THE HANDS OF THE ASSESSEE BECAUSE IT IS A SUBSTITUTE TO GIVING DIRECT INCENTIVE IN CASH FOR AVAILING THE SERVICES OF THE EMPLOYEES. THERE IS NO DIFFERENCE BETWEEN A CASE WH ERE THE COMPANY ISSUES SHARES TO THE PUBLIC AT MARKET PRICE AND PAY S A PART OF THE PREMIUM TO THE EMPLOYEES FOR THEIR SERVICES AND ANOTHER WHE RE THE SHARES ARE DIRECTLY ISSUED TO EMPLOYEES AT A REDUCED RATE. IN BOTH SITUATIONS, THE EMPLOYEES STAND COMPENSATED FOR THEIR EFFORT. BY UN DERTAKING TO ISSUE SHARES AT A DISCOUNT, THE COMPANY DOES NOT PAY ANYT HING TO ITS EMPLOYEES BUT INCURS THE OBLIGATION OF ISSUING SHARES AT A DI SCOUNTED PRICE AT A FUTURE DATE. THIS IS NOTHING BUT 'EXPENDITURE' U/S 37(1); (II) THE LIABILITY CANNOT BE REGARDED AS BEING 'CON TINGENT' IN NATURE BECAUSE THE RENDERING OF SERVICE FOR ONE YEAR IS SINE QUA NON FOR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE SCHEME. ONCE THE SER VICE IS RENDERED FOR ONE YEAR, IT BECOMES OBLIGATORY ON THE PART OF THE COMP ANY TO HONOR ITS COMMITMENT OF ALLOWING THE VESTING OF 25% OF THE OP TION. THE LIABILITY IS INCURRED AT THE END OF THE FIRST YEAR THOUGH IT IS DISCHARGED AT THE END OF THE FOURTH YEAR WHEN THE OPTIONS ARE EXERCISED BY T HE EMPLOYEES. THE FACT THAT SOME OPTIONS MAY LAPSE DUE TO NON-EXERCISE/ RE SIGNATION ETC DOES NOT MAKE THE ENTIRE LIABILITY CONTINGENT; (III) HOWEVER, THE OBLIGATION TO ISSUE SHARES AT A DISCOUNTED PREMIUM DOES NOT ARISE AT THE STAGE THE OPTIONS ARE GRANTED. IT ARISES AT THE STAGE THAT THE OPTIONS ARE VESTED IN THE EMPLOYEES. THE AMOUNT DED UCTIBLE HAS TO BE DETERMINED BASED ON THE PERIOD AND PERCENTAGE OF VE STING UNDER THE ESOP SCHEME; (IV) THERE IS LIKELY TO BE A DIFFERENCE IN THE QUAN TUM OF DISCOUNT AT THE STAGE OF VESTING OF THE STOCK OPTIONS (WHEN THE DEDUCTION IS ALLOWABLE) AND AT THE STAGE OF EXERCISE OF THE OPTIONS. THE DIFFERENCE HA S TO BE ADJUSTED BY MAKING SUITABLE NORTHWARDS OR SOUTHWARDS ADJUSTMENT AT THE TIME OF EXERCISE OF THE OPTION DEPENDING ON THE MARKET PRIC E OF THE SHARES THEN PREVAILING. THE FACT THAT THE SEBI GUIDELINES DO NO T PROVIDE FOR THE ADJUSTMENT OF DISCOUNT AT THE TIME OF EXERCISE OF O PTIONS IS IRRELEVANT BECAUSE ACCOUNTING PRINCIPLES CANNOT AFFECT THE POS ITION UNDER THE INCOME- TAX ACT. (V) ON FACTS, THE ASSESSEE'S METHOD OF CLAIMING A L ARGER DEDUCTION IN THE FIRST YEAR DEFIES LOGIC. AS THE OPTIONS VEST EQUALL Y OVER A PERIOD OF FOUR YEARS, THE DEDUCTION OUGHT TO BE CLAIMED IN FOUR EQ UAL INSTALLMENTS ON A STRAIGHT LINE BASIS (RANBAXY LABORATORIES 124 TTJ 771 (DELHI) REVERSED, S.S.I. LTD. V. DCIT 85 TTJ 1049 (CHENNAI) APPROVED, PVP I.T.A. NO. 1316/HYD/2015 :- 8 - : VENTURES 211 TAXMAN 554 REFERRED. SEE ALSO SPRAY ENGINEERING DEVICES LTD 53 SOT 70 (CHD) 6.4. THE ABOVE DECISION WAS SUBSEQUENTLY FOLLOWED BY THE DIFFERENT CO-ORDINATE BENCHES OF THE TRIBUNAL. 6.5. HOWEVER, THE CO-ORDINATE BENCHES OF DELHI IN THE CASE OF RANBAXY LABORATORIES LTD., AND MUMBAI TRIBUNAL IN THE CASE OF M/S. VIP INDUSTRIES LTD., TOOK A CONTRARY VIEW. HOWEV ER, NEEDLESS TO MENTION THAT THESE DECISIONS WERE RENDERED PRIOR TO DECISIONS OF SPECIAL BENCH OF BANGALORE TRIBUNAL IN THE CASE OF M /S. BIOCON LTD., IN ITA 368/BANG/2010 AND OTHERS DT. 16-07-2013, EVEN ASSUMING THAT THERE IS DIVERGENCE IN JUDICIAL OPINION IT IS TRITE LAW THAT VIEW WHICH IS IN FAVOUR OF ASSESSEE IS TO BE ADOP TED IN VIEW OF THE LAW LAID DOWN BY THE HON'BLE SUPREME COURT IN THE C ASE OF CIT VS. VEGETABLE PRODUCTS LTD., REPORTED AS [88 ITR 192] (SC). FOLLOWING THE RATIO OF HON'BLE SUPREME COURT IN THE SAI D CASE, WE ALLOW THIS GROUND OF APPEAL. 7. IN GROUND NO. 3 ASSESSEE CHALLENGES IN CONFIRMIN G THE DISALLOWANCE OF PROVISION FOR STANDARD AND NON-PERFO RMING ASSETS FOR RS. 52,59,85,047/- 7.1. THE LD.AR SUBMITTED THAT THE APPELLANT IS NBFC, ENG AGED IN THE BUSINESS OF MICRO FINANCE. THE APPELLANT PROVIDED THE PROVISION ON NON-PERFORMING ASSETS IN TERMS OF GUIDELINES ISSU ED BY THE RBI AND THIS WAS CLAIMED AS DEDUCTIBLE EXPENDITURE. THE AO DISALLOWED THE SAME HOLDING THAT IT IS A CONTINGENT EXP ENDITURE AND IT CANNOT BE CLAIMED AS DEDUCTION. THE LD.AR VEHEMEN TLY CONTENDED THAT EVEN OTHERWISE ALSO THIS CLAIM IS ALLOWAB LE AS BAD DEBT SINCE THE PROVISION WAS DEBITED TO P&L A/C AND RE DUCED FROM I.T.A. NO. 1316/HYD/2015 :- 9 - : THE SUNDRY DEBTORS. HE PLACED RELIANCE ON THE JUDGMENT OF HON'BLE APEX COURT IN THE CASE OF VIJAYA BANK VS. CIT AND AN OTHER [323 ITR 166] (SC). 7.2. ON THE OTHER HAND, LD.DR PLACED RELIANCE ON THE ORDERS OF THE LOWER AUTHORITIES. 7.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND OF APPEAL IS SQUARELY COVERED BY THE HON'BLE APEX COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD., VS. JCIT [320 ITR 577] (SC), WHEREIN IT WAS HELD THAT THE PROVISION ON NON-PERFORMING ASSETS AND DEBITE D TO P&L A/C IN TERMS OF THE GUIDELINES OF THE RBI GOVERNING THE INC OME RECOGNITION CANNOT BE ALLOWED TO BE DEDUCTIBLE EXPENDI TURE EITHER U/S. 36(1)(VII) OR (VIIA) AND IT WAS FURTHER HELD THAT THE GUIDELINES OF RBI DOES NOT OVERRIDE THE PROVISIONS OF INCOME TAX AC T, 1961. THE RELEVANT PARAGRAPH OF THE SAID JUDGMENT IS EXTRACTED BE LOW: SCOPE AND APPLICABILITY OF RBI DIRECTIONS 1998 32. RBI DIRECTIONS 1998 HAVE BEEN ISSUED UNDER S. 4 5JA OF RBI ACT. UNDER THAT SECTION, POWER IS GIVEN TO RBI TO ENACT A REGU LATORY FRAMEWORK INVOLVING PRESCRIPTION OF PRUDENTIAL NORMS FOR NBFC S WHICH ARE DEPOSIT TAKING TO ENSURE THAT NBFCS FUNCTION ON SOUND AND H EALTHY LINES. THE PRIMARY OBJECT OF THE SAID 1998 DIRECTIONS IS PRUDE NCE, TRANSPARENCY AND DISCLOSURE. SEC. 45JA COMES UNDER CHAPTER IIIB WHIC H DEALS WITH PROVISIONS RELATING TO FINANCIAL INSTITUTIONS, AND TO NON-BANKING INSTITUTIONS RECEIVING DEPOSITS FROM THE PUBLIC. THE SAID 1998 D IRECTIONS TOUCH VARIOUS ASPECTS SUCH AS INCOME RECOGNITION; ASSET CLASSIFIC ATION; PROVISIONING, ETC. AS STATED ABOVE, BASIS OF THE 1998 DIRECTIONS IS TH AT ANTICIPATED LOSSES MUST BE TAKEN INTO ACCOUNT BUT EXPECTED INCOME NEED NOT BE TAKEN NOTE OF. THEREFORE, THESE DIRECTIONS ENSURE CASH LIQUIDITY F OR NBFCS WHICH ARE NOW REQUIRED TO STATE TRUE AND CORRECT PROFITS, WITHOUT PROJECTING INFLATED PROFITS. THEREFORE, IN OUR VIEW, RBI DIRECTIONS 1998 DEAL ON LY WITH PRESENTATION OF NPA PROVISIONS IN THE BALANCE SHEET OF AN NBFC. IT HAS NOTHING TO DO WITH THE COMPUTATION OR TAXABILITY OF THE PROVISIONS FOR NPA UNDER THE IT ACT. I.T.A. NO. 1316/HYD/2015 :- 10 -: 33. PRIOR TO RBI DIRECTIONS 1998, ADVANCES WERE STA TED NET OF PROVISIONS FOR NPAS/BAD AND DOUBTFUL DEBTS. THEY WERE SHOWN AT NET FIGURE (ADVANCES LESS PROVISIONS FOR NPAS) AND THE AMOUNT OF PROVISI ON FOR NPA WAS SHOWN IN THE NOTES TO THE ACCOUNTS ONLY. SUCH PRESENTATIO N OF NPA PROVISION WARRANTED DISCLOSURE. THEREFORE, PARA 9(1) OF RBI D IRECTIONS 1998 STIPULATES THAT EVERY NBFC SHALL SEPARATELY DISCLOS E IN ITS BALANCE SHEET THE PROVISION FOR NPAS WITHOUT NETTING THEM FROM TH E INCOME OR AGAINST THE VALUE OF ASSETS. THAT, THE PROVISION FOR NPA SHOULD BE SHOWN SEPARATELY ON THE 'LIABILITIES SIDE' OF THE BALANCE SHEET UNDER T HE HEAD 'CURRENT LIABILITIES AND PROVISIONS' AND NOT AS A DEDUCTION FROM 'SUNDRY DEBTORS/ADVANCES'. THEREFORE, RBI HAS TAKEN A POSITION AS A MATTER OF DISCLOSURE, WITH WHICH WE AGREE, THAT IF AN NBFC DEDUCTS A PROVISION FOR N PA FROM 'SUNDRY DEBTORS/LOANS AND ADVANCES', IT WOULD AMOUNT TO NET TING FROM THE VALUE OF ASSETS WHICH WOULD CONSTITUTE BREACH OF PARA 9 OF R BI DIRECTIONS 1998. CONSEQUENTLY, NPA PROVISIONS SHOULD BE PRESENTED ON THE 'LIABILITIES SIDE' OF THE BALANCE SHEET UNDER THE HEAD 'CURRENT LIABIL ITIES AND PROVISIONS' AS A DISCLOSURE NORM AND NOT AS ACCOUNTING OR COMPUTAT ION OF INCOME NORM UNDER THE IT ACT. AT THIS STAGE, WE MAY CLARIFY THA T THE ENTIRE THRUST OF RBI DIRECTIONS 1998 IS ON PRESENTATION OF NPA PROVISION IN THE BALANCE SHEET OF AN NBFC. PRESENTATION/DISCLOSURE IS DIFFERENT FROM COMPUTATION/TAXABILITY OF THE PROVISION FOR NPA. THE NATURE OF EXPENDITURE UNDER THE IT ACT CANNOT BE CONCLUSIVELY DETERMINED BY THE MANNER IN WHICH A CCOUNTS ARE PRESENTED IN TERMS OF 1998 DIRECTIONS. THERE ARE CASES WHERE ON FACTS COURTS HAVE TAKEN THE VIEW THAT THE SO-CALLED PROVISION IS IN E FFECT A WRITE OFF. THEREFORE, IN OUR VIEW, RBI DIRECTIONS 1998, THOUGH DEVIATE FR OM ACCOUNTING PRACTICE AS PROVIDED IN THE COMPANIES ACT, DO NOT OVERRIDE T HE PROVISIONS OF THE IT ACT. SOME COMPANIES, FOR EXAMPLE, TREAT WRITE OFFS OR EXPENSES OR LIABILITIES AS CONTINGENT LIABILITIES. FOR EXAMPLE, THERE ARE C OMPANIES WHICH DO NOT RECOGNIZE MARK-TO-MARKET LOSS ON ITS DERIVATIVE CON TRACTS EITHER BY CREATING RESERVE AS SUGGESTED BY ICAI OR BY CHARGING THE SAM E TO THE P&L A/C IN TERMS OF ACCOUNTING STANDARDS. CONSEQUENTLY, THEIR PROFITS AND RESERVES AND SURPLUS OF THE YEAR ARE PROJECTED ON THE HIGHER SIDE. CONSEQUENTLY, SUCH LOSSES ARE NOT ACCOUNTED IN THE BOOKS, AT THE HIGHEST, THEY ARE MERELY DISCLOSED AS CONTINGENT LIABILITY IN THE NOTES TO A CCOUNTS. THE POINT WHICH WE WOULD LIKE TO MAKE IS WHETHER SUCH LOSSES ARE CO NTINGENT OR ACTUAL CANNOT BE DECIDED ONLY ON THE BASIS OF PRESENTATION . SUCH PRESENTATION WILL NOT BIND THE AUTHORITY UNDER THE IT ACT. ULTIMATELY , THE NATURE OF TRANSACTION HAS TO BE EXAMINED. IN EACH CASE, THE A UTHORITY HAS TO EXAMINE THE NATURE OF EXPENSE/LOSS. SUCH EXAMINATION AND FI NDING THEREON WILL NOT DEPEND UPON PRESENTATION OF EXPENSE/LOSS IN THE FIN ANCIAL STATEMENTS OF THE NBFC IN TERMS OF THE 1998 DIRECTIONS. THEREFORE , IN OUR VIEW, THE RBI DIRECTIONS 1998 AND THE IT ACT OPERATE IN DIFFERENT FIELDS. 34. THE QUESTION STILL REMAINS AS TO WHAT IS THE NA TURE OF 'PROVISION FOR NPA' IN TERMS OF RBI DIRECTIONS 1998. IN OUR VIEW, PROVISION FOR NPA IN TERMS OF RBI DIRECTIONS 1998 DOES NOT CONSTITUTE EX PENSE ON THE BASIS OF WHICH DEDUCTION COULD BE CLAIMED BY NBFC UNDER S. 3 6(1)(VII). PROVISION FOR NPAS IS AN EXPENSE FOR PRESENTATION UNDER 1998 DIRE CTIONS AND IN THAT I.T.A. NO. 1316/HYD/2015 :- 11 - : SENSE IT IS NOTIONAL. FOR CLAIMING DEDUCTION UNDER THE IT ACT, ONE HAS TO GO BY THE FACTS OF THE CASE (INCLUDING THE NATURE OF T RANSACTION), AS STATED ABOVE. ONE MUST KEEP IN MIND ANOTHER ASPECT. REDUCT ION IN NPA TAKES PLACE IN TWO WAYS, NAMELY, BY RECOVERIES AND BY WRI TE OFF. HOWEVER, BY MAKING A PROVISION FOR NPA, THERE WILL BE NO REDUCT ION IN NPA. SIMILARLY, A WRITE OFF IS ALSO OF TWO TYPES, NAMELY, A REGULAR W RITE OFF AND A PRUDENTIAL WRITE OFF. [SEE ADVANCED ACCOUNTS BY SHUKLA, GREWAL , GUPTA, CHAPTER 26, P. 26.50]. IF ONE KEEPS THESE CONCEPTS IN MIND, IT IS VERY CLEAR THAT RBI DIRECTIONS 1998 ARE MERELY PRUDENTIAL NORMS. THEY C AN ALSO BE CALLED AS DISCLOSURE NORMS OR NORMS REGARDING PRESENTATION OF NPA PROVISIONS IN THE BALANCE SHEET. THEY DO NOT TOUCH UPON THE NATURE OF EXPENSE TO BE DECIDED BY THE AO IN THE ASSESSMENT PROCEEDINGS. THEORY OF 'REAL INCOME' 35. AN INTERESTING ARGUMENT WAS ADVANCED BEFORE US TO SAY THAT A PROVISION FOR NPA, UNDER COMMERCIAL ACCOUNTING, IS NOT AN 'INCOME' HENCE THE SAME CANNOT BE ADDED BACK AS IS SOUGHT TO BE DO NE BY THE DEPARTMENT. IN THIS CONNECTION, RELIANCE WAS PLACED ON 'REAL INCOME THEORY'. 36. WE FIND NO MERIT IN THE ABOVE CONTENTION. IN TH E CASE OF POONA ELECTRIC SUPPLY CO. LTD. VS. CIT (1965) 57 ITR 521 (SC) AT P . 530, THIS IS WHAT THE SUPREME COURT HAD TO SAY : 'INCOME-TAX IS A TAX ON THE 'REAL INCOME', I.E., TH E PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE IT ACT. THE REAL PROFIT CAN BE ASCERTAINED ONLY BY MAKING THE PERMISSIBLE D EDUCTIONS UNDER THE PROVISIONS OF THE IT ACT. THERE IS A CLEAR DISTINCT ION BETWEEN THE REAL PROFITS AND STATUTORY PROFITS. THE LATTER ARE STATUTORILY F IXED FOR A SPECIFIED PURPOSE'. 37. TO THE SAME EFFECT IS THE JUDGMENT OF THE BOMBA Y HIGH COURT IN THE CASE OF CWT VS. BOMBAY SUBURBAN ELECTRIC SUPPLY LTD . (1976) 103 ITR 384 (BOM) AT P. 391, WHERE IT WAS OBSERVED AS UNDER : 'INCOME-TAX IS A TAX ON THE REAL INCOME, I.E., PROF ITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE IT ACT, 1961. THE REAL PROFITS CAN BE ASCERTAINED ONLY BY MAKING THE PERMI SSIBLE DEDUCTIONS'. 38. THE POINT TO BE NOTED IS THAT THE IT ACT IS A T AX ON 'REAL INCOME', I.E., THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE IT ACT. THEREFORE, IF BY EXPLANATION TO S. 36(1)(VII) A PROVISION FOR DOUBTFUL DEBT IS KEPT OUT OF THE AMBIT OF THE BAD DEBT WHICH IS W RITTEN OFF THEN, ONE HAS TO TAKE INTO ACCOUNT THE SAID EXPLANATION IN COMPUTATI ON OF TOTAL INCOME UNDER THE IT ACT FAILING WHICH ONE CANNOT ASCERTAIN THE R EAL PROFITS. THIS IS WHERE THE CONCEPT OF 'ADD BACK' COMES IN. IN OUR VIEW, A PROVISION FOR NPA DEBITED TO P&L A/C UNDER THE 1998 DIRECTIONS IS ONL Y A NOTIONAL EXPENSE I.T.A. NO. 1316/HYD/2015 :- 12 -: AND, THEREFORE, THERE WOULD BE ADD BACK TO THAT EXT ENT IN THE COMPUTATION OF TOTAL INCOME UNDER THE IT ACT. 39. ONE OF THE CONTENTIONS RAISED ON BEHALF OF NBFC BEFORE US WAS THAT IN THIS CASE THERE IS NO SCOPE FOR 'ADD BACK' OF THE P ROVISION AGAINST NPA TO THE TAXABLE INCOME OF THE ASSESSEE. WE FIND NO MERI T IN THIS CONTENTION. UNDER THE IT ACT, THE CHARGE IS ON PROFITS AND GAIN S, NOT ON GROSS RECEIPTS (WHICH, HOWEVER, HAS PROFITS EMBEDDED IN IT). THERE FORE, SUBJECT TO THE REQUIREMENTS OF THE IT ACT, PROFITS TO BE ASSESSED UNDER THE IT ACT HAVE GOT TO BE REAL PROFITS WHICH HAVE TO BE COMPUTED ON ORD INARY PRINCIPLES OF COMMERCIAL ACCOUNTING. IN OTHER WORDS, PROFITS HAVE GOT TO BE COMPUTED AFTER DEDUCTING LOSSES/EXPENSES INCURRED FOR BUSINE SS, EVEN THOUGH SUCH LOSSES/EXPENSES MAY NOT BE ADMISSIBLE UNDER SS. 30 TO 43D OF THE IT ACT, UNLESS SUCH LOSSES/EXPENSES ARE EXPRESSLY OR BY NEC ESSARY IMPLICATION DISALLOWED BY THE ACT. THEREFORE, EVEN APPLYING THE THEORY OF REAL INCOME, A DEBIT WHICH IS EXPRESSLY DISALLOWED BY EXPLANATION TO S. 36(1)(VII), IF CLAIMED, HAS GOT TO BE ADDED BACK TO THE TOTAL INCO ME OF THE ASSESSEE BECAUSE THE SAID ACT SEEKS TO TAX THE 'REAL INCOME' WHICH IS INCOME COMPUTED ACCORDING TO ORDINARY COMMERCIAL PRINCIPLE S BUT SUBJECT TO THE PROVISIONS OF THE IT ACT. UNDER S. 36(1)(VII) READ WITH THE EXPLANATION, A 'WRITE OFF' IS A CONDITION FOR ALLOWANCE. IF 'REAL PROFIT' IS TO BE COMPUTED ONE NEEDS TO TAKE INTO ACCOUNT THE CONCEPT OF 'WRITE OF F' IN CONTRADISTINCTION TO THE 'PROVISION FOR DOUBTFUL DEBT'. APPLICABILITY OF SECTION 145 40. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE RBI DIRECTIONS 1998 ARE PRUDENTIAL/PROVISIONING NORMS ISSUED BY RBI UNDER C HAPTER III-B OF THE RBI ACT, 1934. THESE NORMS DEAL ESSENTIALLY WITH IN COME RECOGNITION. THEY FORCE THE NBFCS TO DISCLOSE THE AMOUNT OF NPA IN TH EIR FINANCIAL ACCOUNTS. THEY FORCE THE NBFCS TO REFLECT 'TRUE AND CORRECT' PROFITS. BY VIRTUE OF S. 45Q, AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTION S 1998 VIS--VIS 'INCOME RECOGNITION' PRINCIPLES IN THE COMPANIES ACT, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF. HOWEVER, THESE DIRECTI ONS 1998 AND THE IT ACT OPERATE IN DIFFERENT AREAS. THESE DIRECTIONS 1998 H AVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THESE DIRECTIONS CAN NOT OVER-RULE THE 'PERMISSIBLE DEDUCTIONS' OR 'THEIR EXCLUSION' UNDER THE IT ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND COMPANIE S ACT IS ONLY IN THE MATTER OF INCOME RECOGNITION AND PRESENTATION OF FI NANCIAL STATEMENTS. THE ACCOUNTING POLICIES ADOPTED BY AN NBFC CANNOT DETER MINE THE TAXABLE INCOME. IT IS WELL SETTLED THAT THE ACCOUNTING POLI CIES FOLLOWED BY A COMPANY CAN BE CHANGED UNLESS THE AO COMES TO THE C ONCLUSION THAT SUCH CHANGE WOULD RESULT IN UNDERSTATEMENT OF PROFITS. H OWEVER, HERE IS THE CASE WHERE THE AO HAS TO FOLLOW THE RBI DIRECTIONS 1998 IN VIEW OF S. 45Q OF THE RBI ACT. HENCE, AS FAR AS INCOME RECOGNITION IS CONCERNED, S. 145 OF THE IT ACT HAS NO ROLE TO PLAY IN THE PRESENT DISPU TE. ANALYSIS OF S. 36(1)(VIIA) I.T.A. NO. 1316/HYD/2015 :- 13 - : 41. SEC. 36(1)(VII) PROVIDES FOR A DEDUCTION IN THE COMPUTATION OF TAXABLE PROFITS FOR THE DEBT ESTABLISHED TO BE A BAD DEBT. SEC. 36(1)(VIIA) PROVIDES FOR A DEDUCTION IN RESPEC T OF ANY PROVISION FOR BAD AND DOUBTFUL DEBT MADE BY A SCHEDULED BANK OR NON-S CHEDULED BANK IN RELATION TO ADVANCES MADE BY ITS RURAL BRANCHES, OF A SUM NOT EXCEEDING A SPECIFIED PERCENTAGE OF THE AGGREGATE AVERAGE ADVAN CES BY SUCH BRANCHES. HAVING REGARD TO THE INCREASING SOCIAL COMMITMENT, S. 36(1)(VIIA) HAS BEEN AMENDED TO PROVIDE THAT IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBT MADE BY A SCHEDULED BANK OR A NON-SCHEDULED BANK, A N AMOUNT NOT EXCEEDING A SPECIFIED PER CENT OF THE TOTAL INCOME OR A SPECIFIED PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCH ES, WHICHEVER IS HIGHER, SHALL BE ALLOWED AS DEDUCTION IN COMPUTING THE TAXABLE PROFITS. 42. EVEN S. 36(1)(VII) HAS BEEN AMENDED TO PROVIDE THAT IN THE CASE OF A BANK TO WHICH S. 36(1)(VIIA) APPLIES, THE AMOUNT OF BAD AND DOUBTFUL DEBT SHALL BE DEBITED TO THE PROVISION FOR BAD AND DOUBT FUL DEBT ACCOUNT AND THAT THE DEDUCTION SHALL BE LIMITED TO THE AMOUNT B Y WHICH SUCH DEBT EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBT ACCOUNT. 43. THE POINT TO BE HIGHLIGHTED IS THAT IN CASE OF BANKS, BY WAY OF INCENTIVE, A PROVISION FOR BAD AND DOUBTFUL DEBT IS GIVEN THE BENEFIT OF DEDUCTION, HOWEVER, SUBJECT TO THE CEILING PRESCRIB ED AS STATED ABOVE. LASTLY, THE PROVISION FOR NPA CREATED BY A SCHEDULE D BANK IS ADDED BACK AND ONLY THEREAFTER DEDUCTION IS MADE PERMISSIBLE U NDER S. 36(1)(VIIA) AS CLAIMED. WHETHER PROVISION ON NPA IS ALLOWABLE UNDER S. 37(1 ) ? 44. AS STATED ABOVE, S. 36(1)(VII) AFTER 1ST APRIL, 1989 DRAWS A DISTINCTION BETWEEN WRITE OFF AND PROVISION FOR DOUBTFUL DEBT. THE IT ACT DEALS ONLY WITH DOUBTFUL DEBT. IT IS FOR THE ASSESSEE TO ESTAB LISH THAT THE PROVISION IS MADE AS THE LOAN IS IRRECOVERABLE. HOWEVER, IN VIEW OF EXPLANATION WHICH KEEPS SUCH A PROVISION OUTSIDE THE SCOPE OF 'WRITTE N OFF' BAD DEBT, S. 37 CANNOT COME IN. IF AN ITEM FALLS UNDER SS. 30 TO 36 , BUT IS EXCLUDED BY AN EXPLN. TO S. 36(1)(VII) THEN S. 37 CANNOT COME IN. SEC. 37 APPLIES ONLY TO ITEMS WHICH DO NOT FALL IN SS. 30 TO 36. IF A PROVI SION FOR DOUBTFUL DEBT IS EXPRESSLY EXCLUDED FROM S. 36(1)(VII) THEN SUCH A P ROVISION CANNOT CLAIM DEDUCTION UNDER S. 37 OF THE IT ACT EVEN ON THE BAS IS OF 'REAL INCOME THEORY' AS EXPLAINED ABOVE. ANALYSIS OF SECTION 43D 45. IT IS SIMILAR TO SECTION 43B. THE REASON FOR ENACTING THIS SECTION IS THAT INTERE ST FROM BAD AND DOUBTFUL DEBTS IN THE CASE OF BANK AND FINANCIAL INSTITUTION S IS DIFFICULT TO RECOVER; I.T.A. NO. 1316/HYD/2015 :- 14 -: TAXING SUCH INCOME ON ACCRUAL BASIS REDUCES THE LIQ UIDITY OF THE BANK WITHOUT GENERATION OF INCOME. WITH A VIEW TO IMPROVE THEIR VIABILITY, THE IT ACT HAS BEEN AMENDED BY INSERTING S. 43D TO PROVIDE THAT SUCH INTEREST SHAL L BE CHARGED TO TAX ONLY IN THE YEAR OF RECEIPT OR THE YEAR IN WHICH IT IS CRED ITED TO THE P&L A/C, WHICHEVER IS EARLIER. 46. BEFORE CONCLUDING, WE MAY STATE THAT NONE OF TH E JUDGMENTS CITED ON BEHALF OF THE APPELLANT(S) ARE RELEVANT AS THEY DO NOT TOUCH UPON THE CONCEPT OF NPA. IN OUR VIEW, THE ISSUES WHICH ARISE FOR DETERMINATION IN THIS CASE DID NOT ARISE IN THE CASES CITED BY THE A PPELLANT(S). THE HONBLE DELHI HIGH COURT IN THE CASE OF HOUSING & URBAN DEVELOPMENT CORPORATION LTD. VS. ADDL. CIT (396 ITR 667)(DEL) OBSERVED THAT BASED ON GUIDELINES ISSUED BY THE RESERV E BANK OF INDIA GOVERNING RECOGNITION OF INCOME, NO DEDUCTION CAN BE CLAIMED. THE RELEVANT OBSERVATIONS ARE AS UNDER: .......... A DISTINCTION IS REQUIRED TO BE DRAWN B ETWEEN THE CONCEPT OF 'DEDUCTIONS' CLAIMED UNDER THE ACT WHICH HAS TO SAT ISFY THE CONDITIONS LAID DOWN THEREIN TO QUALIFY AS SUCH AND THE PRUDENTIAL NORMS THAT THE NHB ACT MAY LAY DOWN FOR DETERMINING AN NPA. THE PRESENT CA SE IS SIMILAR TO SOUTHERN TECHNOLOGIES LTD. ( SUPRA ) WHERE THE SUPREME COURT HAD TO DEAL WITH THE CLAIM FOR DEDUCTION ON ACCOUNT OF THE METHOD FO R DETERMINING AN NPA AND NOT CIT V . VASISTH CHAY VYAPAR LTD. ( SUPRA ) WHERE THIS COURT WAS DEALING WITH 'INCOME RECOGNITION' WHICH HAD NOTHING TO DO W ITH SECTION 43D OF THE ACT. THIS GROUND OF APPEAL IS DISMISSED. 8. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH SEPTEMBER, 2017 SD/- SD/- (D. MANMOHAN) (INTURI RAMA RAO) VICE PRESIDENT ACCOUNTANT MEMB ER HYDERABAD, DATED 27 TH SEPTEMBER, 2017 TNMM I.T.A. NO. 1316/HYD/2015 :- 15 - : COPY TO : 1. M/S. BHARAT FINANCIAL INCLUSION LIMITED, (FORMER LY SKS MICROFINANCE LIMITED), C/O. M/S. SEKHAR & CO., CHAR TERED ACCOUNTANTS, 133/4, R.P. ROAD, SECUNDERABAD. 2. THE ADDL. CIT, RANGE-3, HYDERABAD. 3. CIT (APPEALS)-3, HYDERABAD. 4. THE PR.CIT-3, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.
