GE Capital Services India, V. DCIT, Circle-12(1),

ITA 3198/DEL/2004

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65359 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 16-07-2012
• Assessment Year: 1999-2000
• Appeal Filed On: 12-07-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: MADHURI SWAROOP
• Keywords: Depreciation; Earning of tax free income; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO. 3198/DEL/2004 ASSESSMENT YEAR: 1999-2000 M/S GE CAPITAL SERVICE INDIA, AIF ACS BLDG., RAFI MARG, NEW DELHI. PAN NO. AAACG0239L VS. DCIT, CIRCLE 12(1), C.R. BLDG., NEW DELHI. (APPELLANT) (RESPONDENT) & ITA NO. 3200/DEL/2004 ASSESSMENT YEAR: 1999-2000 ACIT, CIRCLE 12(1), C.R. BLDG., NEW DELHI. VS. M/S GE CAPITAL SERVICE INDIA, AIF ACS BLDG., RAFI MARG, NEW DELHI. PAN NO. AAACG0239L (APPELLANT) (RESPONDENT) APPELLANT BY : SH. VIBHU BUKHRU, ADV., SH. TUSHU J ASWAL, ADV. & MS. MADHURI SWAROOP, ADV. RESPONDENT BY : - DATE OF HEARING : 16/07/2012 DATE OF PRONOUNCEMENT : 07/09/201 2 O R D E R PER S.V. MEHROTRA, A.M. THESE CROSS APPEALS ARE FILED BY THE ASSESSEE AND THE REVENUE. THEY ARE DIRECTED AGAINST THE ORDERS OF LD. CIT(A) DATED 27/02/2004 FOR A.Y. 1999-2000. ITA NOS. 3200 & 3198/D/2004 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WAS INCORPORATED ON 22.10.1993 AS A NON-BANKING FINANCI AL COMPANY. IN THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION, THE A SSESSEE COMPANY WAS CARRYING ON THE BUSINESS OF PROVIDING FINANCE TO IN DUSTRY, TRADE, ETC. THROUGH HIGHER PURCHASE, LEASE AND LOANS. IT CARRI ED OUT BILL DISCOUNTING, INVESTMENT AND CAPITAL MARKET CONSULTANCY ALSO. IT HAD FILED ITS RETURN OF INCOME DECLARING NET INCOME OF RS. 35,41,15,580/-, WHICH WAS SUBSEQUENTLY REVISED TO RS. 35,75,88,670/-. THE AS SESSMENT WAS COMPLETED, INTER-ALIA, MAKING FOLLOWING ADDITIONS/D ISALLOWANCES AS UNDER: - SOFTWARE EXPENSES RS. 1,23,114/- DISALLOWANCE ON A/C OF NPA RS. 45,78,232/- DISALLOWANCE ON A/C OF DELAYED PAYMENT OF P.F. RS. 2,14,127/- EXPENDITURE RELATING TO DIVIDEND INCOME RS. 45,40,6 97/- INTEREST/DISCOUNT ON GOVT. SECURITIES RS. 83,03,16 9/- DEPRECIATION ON SOFTWARE EXPENDITURE CONSIDERED AS CAPITAL RS. 3,06,908/- 3. BEING AGGRIEVED WITH THE ORDER OF AO, THE ASSESS EE PREFERRED APPEAL BEFORE LD. CIT(A) WHO PARTLY ALLOWED THE ASSESSEES APPEAL. 4. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A) BOT H ASSESSEE AND DEPARTMENT ARE IN APPEAL BEFORE US. 5. FIRST WE TAKE UP THE ASSESSEES APPEAL VIDE ITA NO. 3198/D/04 : - FIRST GROUND IS GENERAL AND, THEREFORE, DOES NOT RE QUIRE ANY ADJUDICATION. 6. SECOND GROUND RAISED BY THE ASSESSEE READS AS UN DER: - 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN ITA NOS. 3200 & 3198/D/2004 3 CONFIRMING THE DISALLOWANCE OF RS. 45,78,232/- ON ACCOUNT OF THE INTEREST INCOME BOOKED IN EARLIER YEARS BUT REVERSED IN THE CURRENT YEAR AS PER THE RESERVE BANK OF INDIA GUIDELINES IN RESPECT OF NON- PERFORMING ASSETS. 7. BRIEF FACTS APROPOS THIS ISSUE ARE THAT ASSESSEE HAD DEBITED/REVERSED INCOME OF RS. 45,78,232/- ON ACCOUNT OF NPA. THE ASSESSEE EXPLAINED THAT THE REVERSAL OF INCOME HAD BEEN DONE FOLLOWING RBI GUIDELINES ON PRUDENTIAL NORMS FOR INCOME RECOGNITION IN RESPEC T OF NPA. IT WAS FURTHER EXPLAINED THAT ACCOUNTING STANDARD II REQUIRED THAT ANY CHANGE IN ACCOUNTING POLICY WAS TO BE MADE ONLY IF DIFFERENT POLICY WAS REQUIRED BY A STATUTE OR RESULTING IN A MORE APPROPRIATE PREPARAT ION OR PRESENTATION OF FINANCIAL STATEMENTS. THUS, IT WAS SUBMITTED THAT THE REVERSAL OF INCOME WAS IN ACCORDANCE WITH RBI STATUTE AND THE PROVISIO NS OF SEC. 145 OF THE I.T. ACT WOULD NOT COME IN WAY IN THIS REGARD. THE ASSESSEE HAD ALSO RAISED ALTERNATE PLEA, RELYING ON THE DECISION OF O VERSEAS SAMAR FINANCIAL LTD., THAT PROVISION AGAINST BAD AND DOUBTFUL DEBTS BY NBFC, AS PER RBI NORMS, IS DEDUCTIBLE AGAINST THE INCOME OF THE COMP ANY. THE AO POINTED OUT THAT THIS ISSUE WAS EXAMINED IN A.Y. 1998-99 AN D IT WAS HELD THAT REVERSAL OF ACCOUNTING METHOD, REGULARLY EMPLOYED B Y THE ASSESSEE, FROM ACCRUAL TO CASH BASIS, WAS NOT IN ACCORDANCE WITH T HE PROVISIONS OF THE INCOME TAX ACT PARTICULARLY WHEN THE SPECIFIC PROVI SIONS OF SECTION 43D GOVERNED THE CHARGEABILITY TO TAX OF SUCH INCOME. HE, THEREFORE, DID NOT ALLOW THE ASSESSEES CLAIM FOR THE FOLLOWING REASON S: - 8.3 THE INFIRMITIES IN THE AGREEMENTS (ARGUMENTS) OF THE ASSESSEE ARE DISCUSSED BELOW: AS PER SCHEDULE 14 TO AUDITED ACCOUNTS, THE ASSESSEE HAS FOLLOWED THE FOLLOWING ACCOUNTING POLICY REGARDING REVENUE RECOGNITION AND PROVISION REQUIREMENTS, ..ALL OTHER INCOME AND EXPENSES ARE RECOGNIZED ON ACCRUAL BASIS, EXCEPT THAT INCOME ON ACCOUNTS WHICH ARE DELINQUENT FOR MORE THAN 3 MONTHS IS NOT RECOGNIZED. HOWEVER, IN CASES WHERE THE ITA NOS. 3200 & 3198/D/2004 4 RECEIVABLES ARE GUARANTEED BY GENERAL ELECTRIC COMPANY, USA, ITS SUBSIDIARIES OR AN EQUIVALENT THIRD PARTY, INCOME IS NOT RECOGNIZED ON ACCOUNT WHICH ARE DELINQUENT FOR MORE THAN 6 MONTHS. 8. BEFORE LD. CIT(A), THE ASSESSEE HAD CLAIMED THAT INTEREST INCOME BOOKED IN EARLIER YEARS WAS REVERSED IN THE CURRENT YEAR ON ACCOUNT OF REVISED RBI GUIDELINES ON PRUDENTIAL NORMS FOR IN COME RECOGNITION APPLICABLE W.E.F. JANUARY 2, 1998. THE ASSESSEE H AD ALSO MADE AN ALTERNATIVE SUBMISSION THAT THE ASSESSEES CLAIM WA S ALLOWABLE AS BAD AND DOUBTFUL DEBT. IN THIS REGARD IT WAS SUBMITTED THA T SINCE THE AMOUNT OF INCOME REVERSED RELATED TO NON-PERFORMING ASSETS, W HICH WERE IN THE NATURE OF BAD AND DOUBTFUL DEBTS, THEREFORE BOTH TH E CONDITIONS, AS ENVISAGED BY SECTION 36(1)(VII), WERE SATISFIED. T HE ASSESSEE HAD RELIED ON VARIOUS CASE LAWS IN SUPPORT OF ITS SUBMISSION THAT AFTER THE AMENDMENT OF SECTION 36(1)(VII) W.E.F. APRIL 1, 1981, IF DEBT HA D BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR T HE PREVIOUS YEAR, IT WILL SUFFICE FOR CLAIMING IT AS A BAD DEBT AND THE ASSES SEE CAN NEVER BE CALLED UPON TO PROVE THAT THE SAID DEBT HAD BECOME BAD. 8.1 LD. CIT(A) DID NOT ACCEPT THE FIRST PLEA OF THE ASSESSEE, INTER-ALIA, ACCEPTING THE AOS CONTENTION THAT REVISION OF INCO ME IN RESPECT OF NPAS TANTAMOUNT TO FOLLOWING CASH SYSTEM OF ACCOUNTING. HE ALSO OBSERVED THAT IN VIEW OF THE DISCUSSION OF AO ON THIS ISSUE AND T HE SPECIFIC PROVISIONS OF SEC. 43D, THE ASSESSEES CLAIM WAS NOT ACCEPTABLE. HOWEVER, HE ACCEPTED THE ALTERNATE PLEA OF THE ASSESSEE AND RESTORED THE MATTER BACK TO THE FILE OF AO OBSERVING THAT ASSESSEE HAD NOT CLARIFIED WHE THER THE INTEREST INCOME HAD ACTUALLY BEEN RECEIVED AND THE SAME WAS REVERSED OR IT WAS JUST A BOOK ENTRY REVERSED SUBSEQUENTLY. HE DIRECT ED THE AO TO VERIFY THE ASPECT AND ALLOW, IF ADMISSIBLE, IN VIEW OF HIS OWN OBSERVATIONS IN THE ASSESSMENT ORDER. ITA NOS. 3200 & 3198/D/2004 5 9. BEING AGGRIEVED WITH THE FINDINGS OF LD. CIT(A) BOTH ASSESSEE AND DEPARTMENT ARE IN APPEAL BEFORE US. THE ASSESSEE I S AGGRIEVED FOR NOT ACCEPTING ITS PLEA BY LD. CIT(A) THAT IN VIEW OF RB IS PRUDENTIAL NORMS, INCOME IN RESPECT OF NPA CAN BE RECOGNIZED ONLY WHE N IT IS ACTUALLY RECEIVED AND ANY INCOME RECOGNIZED, BEFORE THE ASSE T BECAME NON- PERFORMING WAS REQUIRED TO BE REVERSED. THE DEPART MENT IS AGGRIEVED WITH THE FINDINGS OF LD. CIT(A) IN ACCEPTING THE ALTERNA TE PLEA OF ASSESSEE AND RESTORING THE MATTER TO THE FILE OF AO FOR VERIFICA TION. PRESENTLY WE ARE CONSIDERING THE ASSESSES APPEAL. 10. LD. DR RELIED ON THE ORDER OF LD. CIT(A) AND SU BMITTED THAT SINCE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING, THE INTEREST INCOME HAD TO BE TAKEN INTO CONSIDERATION ON ACCRUA L BASIS. 11. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT (I) IT IS WELL SETTLED LAW THAT ONLY REAL INCOME CAN BE TAXED NOTWITHSTANDING THAT ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, (II) THIS ISSUE IS COVERED BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT VS. VASISTH CHAY VYAPAR LTD., 330 ITR 440 (DEL.) [2011] . HE FURTHER POINTED OUT THAT THIS DECISION HAS BEEN FOLLOWED IN 335 ITR 182. 12. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. BEFORE WE EMBARK U PON ANY DISCUSSION, WE MAY CLARIFY THAT APPLICABILITY OF SECTION 43D HA S SPECIFICALLY BEEN RULED OUT BY THE ASSESSING OFFICER AND, THEREFORE, THE OB SERVATIONS OF LD. CIT(A) IN REGARD TO SPECIFIC PROVISIONS OF SECTION 43D REF ERRED TO PARA 5.3 HAVE TO BE READ IN THAT CONTEXT ONLY. 13. ADMITTEDLY THE ASSESSEE IS A NON-BANKING FINANC IAL COMPANY GOVERNED BY THE PROVISIONS OF THE RBI ACT AND THE N BFCS PRUDENTIAL ITA NOS. 3200 & 3198/D/2004 6 NORMS (RESERVE BANK) DIRECTIONS, 1998. SECTION 45Q OF THE RBI ACT READS AS UNDER: - 45Q CHAPTER III-B TO OVERRIDE OTHER LAWS THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CONTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW. THUS, THIS SECTION TAKES PRECEDENCE OVER ANY OTHER LAW AND, THEREFORE, SECTION 145 HAS TO BE READ SUBJECT TO PROVISIONS IN THE RBI ACT. THE ASSESSEE COMPANY BEING NBFC WAS BOUND BY THE PROVIS IONS OF RBI ACT. THE RBI HAS ISSUED A NOTIFICATION, IN EXERCISE OF I TS POWERS U/S 45JA, ON NBFCS PRUDENTIAL NORMS (RBI), 1998. THE REVENUES CONTENTION IS THAT ON ACCOUNT OF REVERSAL OF INTEREST INCOME, THE ASSESSE E HAS IN EFFECT RESORTED TO CASH SYSTEM OF ACCOUNTING, WHICH IS IN CONTRAVEN TION TO THE PROVISIONS OF SECTION 145, AS ASSESSEE WAS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING. THIS PLEA CANNOT BE ACCEPTED BECAUSE OF THE SPECIFI C PROVISIONS CONTAINED IN THE RESERVE BANK OF INDIA ACT WHICH PRIMARILY AD MINISTER THE FUNCTIONING OF ASSESSEE. THERE IS NO DISPUTE THAT ASSESSEE HAD REVERSED THE INCOME IN RESPECT OF NPA AS PER THE PRUDENTIAL NORMS. TH E ASSESSEE HAD TO COMPLY WITH THE REQUIREMENTS OF RBI NORMS AND, THER EFORE, COULD NOT ACCOUNT FOR THE INCOME IN RESPECT OF ASSETS WHICH H AD BECOME NPA. THEREFORE, SECTION 145 COULD NOT BE RESORTED TO FOR ACCOUNTING INCOME PURELY ON ACCRUAL BASIS. WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT IN CIT VS. VAS ISTH CHAY VYAPAR LTD., 330 ITR 440 (SUPRA), WHEREIN HONBLE DELHI HIGH COU RT HAS OBSERVED AS UNDER: - WE HAVE CONSIDERED THE RESPECTIVE SUBMISSIONS IN THEIR PROPER PERSPECTIVE. BEFORE WE EMBARK ON THE DISCUSSION ON THESE ARGUMENTS, IT WOULD BE USEFUL T O EXTRACT THE RELEVANT PROVISIONS OF THE RBI ACT AND THE NBFCS PRUDENTIAL NORMS (RESERVE BANK) ITA NOS. 3200 & 3198/D/2004 7 DIRECTIONS, 1998. SECTION 45Q OF THE RBI ACT, WHIC H STARTS WITH NON OBSTANTE CLAUSE, READS AS UNDER: 45Q CHAPTER III-B TO OVERRIDE OTHER LAWS THE PROVISIONS OF THIS CHAPTER SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWITH CONTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW. IT IS NOT IN DISPUTE THAT ON THE APPLICATION OF THE AFORESAID PROVISIONS OF THE RBI AND THE DIRECTIONS, THE ICD ADVANCED TO M/S SHAW WALLACE BY THE ASSESSEE HEREIN HAD BECOME NPA. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE COMPANY BEING NBFC IS BOUND BY THE AFORESAID PROVISIONS. THEREFORE, UNDE R THE AFORESAID PROVISIONS, IT WAS MANDATORY ON THE PART OF THE ASSESSEE NOT TO RECOGNIZE THE INTEREST ON THE ICD AS INCOME HAVING REGARD TO THE RECOGNIZED ACCOUNTING PRINCIPLES. THE ACCOUNTING PRINCIPLES WHICH THE ASSESSEE IS INDUBITABLY BOUND TO FOLLOW ARE AS-9. THE RELEVANT PORTION OF THE SAID ACCOUNTING STANDARD READS AS UNDER: 9. EFFECT OF UNCERTAINTIES ON REVENUE RECOGNITION 9.1 RECOGNITION OF REVENUE REQUIRES THAT REVENUE IS MEASURABLE AND THAT AT THE TIME OF SALE OR THE RENDERING OF THE SERVICE IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIMATE COLLECTION. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLECTION WITH REASONABLE CERTAINTY IS LACKING AT THE TIME OF RAISING ANY CLAIM, E.G., FOR ESCALATION OF PRICE, EXPORT INCENTIVES, INTEREST ETC., REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN SUCH CASES, IT MAY BE APPROPRIATE TO RECOGNIZE REVENUE ONLY WHEN IT IS REASONABLY CERTAIN THAT THE ULTIMATE COLLECTION WILL BE MADE. WHERE THERE IS NO UNCERTAINTY AS TO ULTIMATE COLLECTION, REVENUE IS RECOGNIZED AT THE TIME OF SALE OR RENDERING OF SERVICE EVEN THOUGH PAYMENTS ARE MADE BY INSTALMENTS. 9.3 WHEN THE UNCERTAINTY RELATING TO COLLECTABILITY ARISES SUBSEQUENT TO THE TIME OF SALE OR THE RENDERING OF THE SERVICE, IT IS MORE APPROPRIATE TO MAKE A SEPARATE PROVISION TO REFLECT THE UNCERTAINTY RATHER THAN TO ADJUST THE AMOUNT OF REVENUE ORIGINALLY RECORDED. 9.4 AN ESSENTIAL CRITERION FOR THE RECOGNITION OF REVENUE IS THAT THE CONSIDERATION RECEIVABLE FOR THE SALE OF GOODS, THE RENDERING OF SERVICES OR FROM THE USE OF OTHERS OF ENTERPRISE RESOURCES IS ITA NOS. 3200 & 3198/D/2004 8 REASONABLY DETERMINABLE. WHEN SUCH CONSIDERATION IS NOT DETERMINABLE WITHIN REASONABLE LIMITS, THE RECOGNITION OF REVENUE IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO THE EFFECT OF UNCERTAINTIES, IT IS CONSIDERED AS REVENUE OF THE PERIOD IN WHICH IT IS PROPERLY RECOGNIZED. IN THIS SCENARIO, WE HAVE TO EXAMINE THE STRENGTH I N THE SUBMISSION OF LEARNED COUNSEL FOR THE REVENUE THAT WHETHER IT CAN STILL BE HELD THAT INCOME IN TH E FORM OF INTEREST THOUGH NOT RECEIVED HAD STILL ACCRUED TO THE ASSESSEE UNDER THE PROVISIONS OF THE INCOME-TAX ACT AND WAS, THEREFORE, EXIGIBLE TO TAX. OUR ANSWER IS IN THE NEGATIVE AND WE GIVE THEN FOLLOWING REASONS IN SUPPORT: (1) FIRST OF ALL WE WOULD DISCUSS THE MATTER IN THE LIGHT OF THE PROVISIONS OF THE I.T. ACT AND TO EXAMINE AS TO WHETHER IN THE GIVEN CIRCUMSTANCES, INTEREST INCOME HAS ACCRUED TO THE ASSESSEE. IT IS STATED AT THE COST OF REPETITION THAT THE ADMITTED POSITION IS THAT THE ASSESSEE HAD NOT RECEIVED ANY INTEREST ON THE SAID ICD PLACED WITH SHAW WALLACE SINCE THE AY 1996-97 AS IT HAD BECOME NPAS IN ACCORDANCE WITH THE PRUDENTIAL NORMS WHICH WAS ENTERED IN THE BOOKS OF ACCOUNT AS WELL. THE ASSESSEE HAS FURTHER SUCCESSFULLY DEMONSTRATED THAT EVEN IN THE SUCCEEDING ASSESSMENT YEARS, NO INTEREST WAS RECEIVED AND THE POSITION REMAINED THE SAME UNTIL THE AY 2006-07. REASON WAS ADVERSE FINANCIAL CIRCUMSTANCES AND THE FINANCIAL CRUNCH FACED BY SHAW WALLACE. SO MUCH SO, IT WAS FACING WINDING UP PETITIONS WHICH WERE FILED BY MANY CREDITORS. THESE CIRCUMSTANCES, LED TO AN UNCERTAINTY IN SO FAR AS RECOVERY OF INTEREST WAS CONCERNED, AS A RESULT OF THE AFORESAID PRECARIOUS FINANCIAL POSITION OF SHAW WALLACE. WHAT TO TALK OF INTEREST, EVEN THE PRINCIPAL AMOUNT ITSELF HAD BECOME DOUBTFUL TO RECOVER. IN THIS SCENARIO IT WAS LEGITIMATE MOVE TO INFER THAT INTEREST INCOME THEREUPON HAS NOT ACCRUED. WE ARE IN AGREEMENT WITH THE SUBMISSION OF MR. VOHAR ON THIS COUNT, SUPPORTED BY VARIOUS DECISIONS OF DIFFERENT ITA NOS. 3200 & 3198/D/2004 9 HIGH COURTS INCLUDING THIS COURT WHICH HAS ALREADY BEEN REFERRED TO ABOVE. (2) IN THE INSTANT CASE, THE ASSESSEE-COMPANY BEING NBFC IS GOVERNED BY THE PROVISIONS OF THE RBI ACT. IN SUCH A CASE, INTEREST INCOME CANNOT BE SAID TO HAVE ACCRUED TO THE ASSESSEE HAVING REGARD TO THE PROVISIONS OF SECTION 45Q OF THE RBI ACT AND PRUDENTIAL NORMS ISSUED BY THE RBI IN EXERCISE OF ITS STATUTORY POWERS. AS PER THESE NORMS, THE ICD HAD BECOME NPA AND ON SUCH NPA WHERE THE INTEREST WAS NOT RECEIVED AND POSSIBILITY OF RECOVERY WAS ALMOST NIL, IT COULD NOT BE TREATED TO HAVE BEEN ACCRUED IN FAVOUR OF THE ASSESSEE. AS NOTED ABOVE, MR. SABHARWAL, ARGUED THAT THE CASE OF THE ASSESSEE WAS TO BE DEALT WITH FOR THE PURPOSE OF TAXABILITY AS PER THE PROVISIONS OF THE ACT AND NOT THE RBI ACT WHICH WAS THE ACCOUNTING METHOD THAT THE ASSESSEE WAS SUPPOSED TO FOLLOW. WE HAVE ALREADY HELD THAT EVEN UNDER THE INCOME- TAX ACT, INTEREST INCOME HAD NOT ACCRUED. MOREOVER, THIS SUBMISSION OF MR. SABHARWAL IS BASED ENTIRELY ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGY [2010] 320 ITR 577. NO DOUBT, IN FIRST BLUSH, READING OF THE JUDGEMENT GIVES AN INDICATION THAT THE COURT HAS HELD THAT THE RBI ACT DOES NOT OVERRIDE THE PROVISIONS OF THE INCOME-TAX ACT. HOWEVER, WHEN WE EXAMINE THE ISSUE INVOLVED THEREIN MINUTELY AND DEEPLY IN THE CONTEXT IN WHICH THAT HAD ARISEN AND CERTAIN OBSERVATIONS OF THE APEX COURT CONTAINED IN THAT VERY JUDGMENT, WE FIND THAT THE PROPOSITION ADVANCED BY MR. SABHARWAL MAY NOT BE ENTIRELY CORRECT. IN THE CASE BEFORE THE SUPREM E COURT, THE ASSESSEE A NBFC DEBITED RS. 81,68,516/- AS PROVISION AGAINST NPA IN THE PROFIT AND LOSS ACCOUNT, WHICH WAS CLAIMED AS DEDUCTION IN TERMS OF SEC. 36(1)(VII) OF THE ACT. THE ASSESSING OFFICER DID NOT ALLOW THE DEDUCTION CLAIMED AS AFORESAID ON THE GROUND THAT THE PROVISION OF NPA WAS NOT IN THE NATURE OF EXPENDITURE OR LOSS BUT MORE IN THE NATURE OF A RESERVE, AND THUS NOT DEDUCTIBLE U/S 36(1)(VII) OF THE ACT. THE AO, HOWEVER, DID NOT BRING TO TAX RS. 20,34,605 AS INCOME (BEING INCOME ACCRUED UNDER ITA NOS. 3200 & 3198/D/2004 10 THE MERCANTILE SYSTEM OF ACCOUNTING). THE DISPUTE BEFORE THE APEX COURT CENTERED AROUND DEDUCTIBILITY OF PROVISION FOR NPA. AFTER ANALYZIN G THE PROVISIONS OF THE RBI ACT, THEIR LORDSHIPS OF THE APEX COURT OBSERVED THAT IN SO FAR AS THE PERMISSIBLE DEDUCTIONS OR EXCLUSIONS UNDER THE ACT ARE CONCERNED, THE SAME ARE ADMISSIBLE ONLY IF SUCH DEDUCTIONS/EXCLUSIONS SATISFY THE RELEVANT CONDITIONS STIPULATED THEREFORE UNDER THE ACT. TO THAT EXTENT, IT WAS OBSERVED THAT THE PRUDENTIAL NORMS DO NOT OVERRIDE THE PROVISIONS OF THE ACT. HOWEVER, THE APEX COURT MADE A DISTINCTION WITH REGARD TO INCOME RECOGNITION AND HELD THAT INCOME HAD TO BE RECOGNIZED IN TERMS OF THE PRUDENTIAL NORMS, EVEN THOUGH THE SAME DEVIATED FROM THE MERCANTILE SYSTEM OF ACCOUNTING AND/OR SECTION 145 OF THE I.T. ACT. IT CAN BE SAID, THEREFORE, THAT THE APEX COURT APPROVED THE REAL INCOME THEORY WHICH IS ENGRAINED IN THE PRUDENTIAL NORMS FOR RECOGNITION OF REVENUE BY NBFC. 14. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT, THE ASSESSEES CLAIM OF REVERSAL OF INCOME, AGGREGATING TO RS. 45,78,232/- IS ALLOWED. 15. IN THE RESULT, THIS GROUND IS ALLOWED. 16. GROUND NO. 3 READS AS UNDER: - 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN REJECTING THE APPELLANTS CLAIM OF RS. 2,11,495/- O N ACCOUNT OF DELAYED PAYMENT OF PROVIDENT FUND. 17. BRIEF FACTS APROPOS THIS ISSUE ARE THAT AO NOTI CED THAT EMPLOYERS CONTRIBUTION TO PROVIDENT FUND FOR OCTOBER, 1998 WA S MADE THROUGH CHEQUE, WHICH WAS CLEARED ON 19/12/1998 AND NOT WIT HIN 15 DAYS FROM THE PAYMENT. THE AMOUNT INVOLVED WAS RS. 2,11,495/-. HE FURTHER DISALLOWED ITA NOS. 3200 & 3198/D/2004 11 RS. 2,632/- IN REGARD TO EMPLOYEES CONTRIBUTION WHI CH WAS PAID ON 08/04/1999. LD. CIT(A) UPHELD THE DISALLOWANCE. 18. HAVING HEARD BOTH THE PARTIES, WE FIND THAT T HE AMOUNT HAD BEEN PAID, IN ANY VIEW OF THE MATTER, BEFORE THE DUE DAT E OF FILING THE RETURN AND, THEREFORE, THE ASSESSEES CLAIM WAS ALLOWABLE IN VI EW OF THE DECISION IN THE CASE OF CIT VS. DHARMENDRA SHARMA [2008], 297 ITR 3 20 (DEL.). 19. IN THE RESULT, THIS GROUND IS ALLOWED. 20. GROUND NO. 4 READS AS UNDER: - 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN UPHOLDING AN ADHOC DISALLOWANCE OF RS. 45,40,697/- I.E. 25% OF THE DIVIDEND INCOME, ON ACCOUNT OF NOTIONAL MANAGEMENT/ADMINISTRATIVE EXPENSES AND OTHER COSTS INCURRED IN EARNING DIVIDEND INCOME. 21. THE AO NOTICED THAT ASSESSEE HAD RECEIVED DIVID END OF RS. 1,81,62,786/- WHICH HAD BEEN CLAIMED AS FULLY EXEMP T U/S 10(33). HE ESTIMATED 25% OF RS. 1,81,62,786/- BEING SPENT TOWA RDS MANAGEMENT/ADMINISTRATIVE EXPENSES AND OTHER COSTS RELATING TO EARNING OF DIVIDEND. HE, ACCORDINGLY, REDUCED SUM OF RS. 45,4 0,697/- FROM EXEMPT INCOME AND ADDED TO THE TAXABLE INCOME. 22. LD. CIT(A) UPHELD THE AOS ACTION FOLLOWING THE DECISION FOR A.Y. 1996-97. 23. LD. COUNSEL SUBMITTED THAT 98% OF THE DIVIDEND INCOME WAS EARNED FROM INVESTMENTS IN GROUP COMPANIES WHICH WERE MADE LONG BACK. IN THIS ITA NOS. 3200 & 3198/D/2004 12 REGARD HE REFERRED TO PAGE 7 OF LD. CIT(A)S ORDER, WHEREIN THE DETAILS OF INVESTMENTS ARE CONTAINED WHICH ARE AS UNDER: - DIVIDEND RECEIVED FROM AMOUNT (RS.) GE COUNTRYWIDE CONSUMER FINANCIAL SERVICES 1,28,33,336 MARUTI COUNTRYWIDE 44,40,000 IGE 6,00,000 MAHINDRA SONA 2,89,450 TOTAL 1,81,62,786 24. LD. COUNSEL SUBMITTED THAT LD. CIT(A) HAS FOLLO WED THE ORDER FOR AY 1996-97 WHICH IS CONTAINED AT PAGE 15 TO 34 OF PAPE R BOOK AND REFERRED TO PAGE 18 OF THE SAID ORDER. HE POINTED OUT THAT THE ISSUE RELATED TO THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 80M OF THE AC T ON GROSS BASIS. IN THAT CONTEXT THE AO HAD OBSERVED THAT THE INVESTMEN TS WERE MADE OUT OF BORROWINGS AND, THEREFORE, RELYING ON THE EARLIER Y EARS ORDER HE ESTIMATED NOTIONAL INCOME AND EXPENSES RELATING TO SUCH INVES TMENTS AMOUNTING TO RS. 34,51,733/-. HOWEVER, IN THE PRESENT ASSESSMEN T YEAR, THE AO HAS ALLOCATED EXPENSES UNDER MANAGEMENT AND ADMINISTRAT IVE HEADS. THEREFORE, THE DECISION FOR AY 1996-97 IS NOT RELEV ANT. LD. COUNSEL SUBMITTED THAT NO PART OF EXPENDITURE CAN BE SAID T O BE ATTRIBUTABLE OR INCIDENTAL TO THE EARNING OF EXEMPT INCOME. 25. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE, UNDER SECTION 14A, NO DEDUCTION IS ALLOWABLE IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. T HEREFORE, THERE HAS TO BE DIRECT NEXUS BETWEEN THE EARNING OF EXEMPT INCOME A ND EXPENDITURE INCURRED BY THE ASSESSEE. THE EXPENDITURE, WHICH I S ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME, IS ALSO NOT ALLOWABLE. T HE AO HAS ALLOCATED 25% OF THE DIVIDEND INCOME TOWARDS MANAGEMENT/ADMIN ISTRATIVE EXPENSES AND OTHER COSTS RELATING TO EARNING OF DIVIDEND. H OWEVER, HE HAS NOT TAKEN INTO CONSIDERATION THE FACT THAT 98% OF THE DIVIDEN D INCOME WAS DERIVED BY THE ASSESSEE FROM GROUP COMPANIES IN WHICH ASSESSEE WAS NOT REQUIRED TO ITA NOS. 3200 & 3198/D/2004 13 PUT IN ANY EXTRA EFFORTS. IT IS NOT DISPUTED THAT THE INVESTMENTS WERE MADE LONG BACK. 26. LD. CIT(A) HAS RELIED ON HIS DECISION FOR AY 1996-97 BUT THE FACTS WERE ENTIRELY DIFFERENT IN THAT YEAR IN-AS-MUCH AS AO HAD MADE DISALLOWANCE ON ACCOUNT OF INTEREST PAID ON BORROWE D CAPITAL. HOWEVER, IN THE PRESENT ASSESSMENT YEAR HE HAS NOT MENTIONED AN YTHING ON THIS COUNT. IF THE INVESTMENTS CONTINUED FROM THE BORROWED CAPI TAL THEN DISALLOWANCE WAS CALLED FOR. WE FIND THAT NEITHER AO NOR LD. CI T(A) HAS RECORDED ANY FINDING ON THIS COUNT. UNDER SUCH CIRCUMSTANCES, C ONSIDERING THE ENTIRETY OF FACTS, WE RESTORE THE MATTER TO THE FILE OF AO F OR MAKING DISALLOWANCE ON REASONABLE BASIS. IN THE RESULT, THIS GROUND IS AL LOWED FOR STATISTICAL PURPOSES. 27. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 28. ITA NO. 3200/DEL/2004 : - THE FIRST GROUND OF APPEAL READS AS UNDER: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 81 99745/- ON ACCOUNT OF ACCRUED INTEREST ON GOVT. SECURITIES. 29. BRIEF FACTS APROPOS THIS ISSUE ARE THAT AO NOTI CED THAT IN COMPUTATION OF INCOME, THE ASSESSEE EXCLUDED FROM ITS INCOME AN AMOUNT OF RS. 81,99,745/- REPRESENTING INTEREST ON GOVERNMENT SEC URITIES BEING INTEREST ACCRUED BUT NOT DUE. THE ASSESSEES CLAIM WAS THAT THE AMOUNT WAS TO BE OFFERED TO TAX ONLY AT THE TIME IT BECAME DUE. THE AO OBSERVED THAT SINCE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING AND THE COMPANY ITSELF WAS TAKING THIS INTEREST IN ITS AUDITED PROF IT AND LOSS ACCOUNT AS ITS INCOME, THIS INTEREST INCOME HAD ACCRUED TO THE ASS ESSEE AND HENCE IT WAS NOT TO BE EXCLUDED FROM INCOME OF THE ASSESSEE. TH E AO REJECTED THE ITA NOS. 3200 & 3198/D/2004 14 ASSESSEES CLAIM OF ACCOUNTING FOR INTEREST ON GOVE RNMENT SECURITIES ON CASH BASIS. THE AO DISTINGUISHED THE DECISION IN T HE CASE OF DALMIA DADRI CEMENT VS. CIT, 126 ITR 851 ON THE GROUND THAT IN T HE SAID DECISION ISSUE INVOLVED WAS DEBENTURE REDEMPTION AND WHETHER DEBEN TURE REDEEMED BY PAYING LUMP SUM EXCESS PAID OVER FACE VALUE WAS TO BE ALLOWED AS BUSINESS OUTGOING. HE POINTED OUT THAT IN THE PRE SENT CASE GOVERNMENT SECURITIES ARE IN THE BOOKS OF THE ASSESSEE AS INVE STMENTS AS ON 31/03/1999. THERE WAS NO TRADING OR REDEMPTION WHI CH WAS INVOLVED. HE, THEREFORE, MADE AN ADJUSTMENT OF RS. 83,03,169/- OB SERVING AS UNDER: - FOR THIS REASON, AMOUNT OF RS. 81,99,745/- IS TO BE ADDED TO THE INCOME OF THE ASSESSEE AS ALSO DONE IN ORDER FOR ASSESSMENT YEAR 1998-99 WHERE AN AMOUNT OF RS. 1,65,02,914/- WAS ADDED BACK. CONSEQUENTLY, THIS CORRESPONDING AMOUNT OF RS. 1,65,02,914/-, ADDED IN LAST YEAR, IS ALLOWED AS DEDUCTION, AND THE DIFFERENCE OF RS. 83,03,169/- IS , THEREFORE, ALLOWED. 30. LD. CIT(A) ALLOWED THE ASSESSEES APPEAL FOLLOW ING THE DECISION FOR AY 1996-97 AND 1997-98 AND ALSO RELYING ON THE DECI SION OF ITAT IN THE CASE OF STATE BANK OF BIKARNER AND JAIPUR VS. DCIT, 74 ITD 203. HE, ACCORDINGLY, DELETED THE DISALLOWANCE OF RS. 81,99, 745/- BEING INTEREST ACCRUED BUT NOT DUE ON GOVERNMENT SECURITIES AND DI RECTED TO BRING TO TAX RS. 1,65,02,914/- BEING INTEREST ACCRUED IN THE EAR LIER YEAR BUT BECOMING DUE AND RECEIVED IN THE CURRENT YEAR.. 31. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR AY 1996-97 AND 1997-98, WHEREIN IN PARA 24 & 25, TRIBUNAL HAS OBSE RVED AS UNDER: - 24. WE NOT TURN TO APPEALS FILED BY THE REVENUE. THE MAJOR ISSUE INVOLVED IN BOTH THE APPEALS FILED BY THE REVENUE FOR ASSTT. YEAR 1996-97 AND 1997-98 IS DELETION OF THE DISALLOWANCE OF RS. 92,31,360/- IN ITA NOS. 3200 & 3198/D/2004 15 RELATION TO AY 1996-97 AND RS. 19,81,291/- IN RELATION TO AY 1997-98 MADE BY THE LD. AO FOR INTEREST ACCRUED BUT NOT DUE. FACTS OF THE CASE LEADING TO THIS DISPUTE BRIEFLY ARE THAT THE ASSESS EE EXCLUDED IN ITS COMPUTATION OF INCOME ATTACHED TO THE RETURN OF INCOME, THE AMOUNTS REPRESENTING GOVERNMENT SECURITIES ON THE GROUND THAT THE SAME HAD NOT FALLEN DUE FOR PAYMENT. ACCORDING TO THE ASSESSEE THE AMOUNT WOULD BE OFFERED TO TAX ONLY AT THE TIME THE SAME BECAME DUE FOR PAYMENT TO THE ASSESSEE. THE LD. AO HELD THAT AS THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING THERE WAS DEVIATION IN THE COMPUTATION OF INCOME AS FILED BY THE ASSESSEE ALONG WITH RETURN. HE FURTHER HELD TH AT THE RELIANCE PLACED BY THE ASSESSEE ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF VIJAYA BANK LTD. VS. ACIT [1991] 94 CTR (SC) 216 : [1991] 187 ITR 541 (SC) WAS NOT JUSTIFIED. THAT JUDGMENT RELATED TO INTEREST PERTAINING TO PERIOD PRIOR TO PURCHASE OF THE SECURITY. THE LD. AO MADE ADDITIONS ACCORDINGLY. ON ASSESSEES APPEAL THE LD . CIT(A) HELD THAT THE ASSESSEE HAD HIMSELF OFFERED T HE SUM OF RS. 92,31,360 FOR AY 1997-98. THE CLAIM OF THE ASSESSEE WAS COVERED BY THE DECISION OF THE TRIBUNAL IN THE CASE OF STATE BANK OF BIKANER & JAIPUR VS. DCIT [1999] 65 TTJ (JP) 480 : [2000]74 ITD 203 (JP). RELYING UPON THAT DECISION, THE LD. CIT(A) DELETED THE DISALLOWANCE OF RS. 92,31,360 FO R AY 1996-97. FOR AY 1997-98 THE LD. AO MADE AN ADDITION OF RS. 19,81,271 ON THE SAME BASIS. THE L D. CIT(A) DELETED THE ADDITION FOLLOWING ORDER FOR AY 1996-97. 25. DURING THE COURSE OF HEARING BEFORE US THE LD. DEPARTMENTAL REPRESENTATIVE ARGUED THAT THE DECISION OF THE TRIBUNAL REPORTED IN [1999] 65 TTJ (JP) 480 : [2000] 74 ITD 203 (JP) (SUPRA) HAD BEEN GIVEN IN RELATION TO A BANK WHEREAS THE ASSESSEE BEFORE US WAS NOT A BANK. THE LD. COUNSEL FOR THE ASSESSEE ARGUED THAT THE CASE OF THE ASSESSEE WAS NOT PROPERLY DISTINGUISHED. THE ASSESSEE WAS CONTROLLED BY RBI GUIDELINES APPLICABLE TO NON- BANKING FINANCIAL CORPORATIONS. THE ASSESSEE SUBMITTED THAT THE SECURITIES IN QUESTION HAD BEEN ACQUIRED IN VIEW OF THE SAID RBI GUIDELINES ONLY. THE SAME DID NOT CONSTITUTE THE ASSESSEES STOCK-IN - ITA NOS. 3200 & 3198/D/2004 16 TRADE. THE LD. COUNSEL ARGUED THAT IN ADDITION TO TRIBUNAL DECISION REPORTED IN [1999] 65 TTJ (JP) 49=80 : [2000] 74 ITD 203 (JP) (SUPRA) THE CASE OF THE ASSESSEE WAS ALSO GOVERNED BY THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. PUNJAB & SIND BANK LTD. [1999] 157 CTR (DEL) 116; [1999] 239 ITR 343 (DEL). RESPECTFULLY MOWING THE AFORESAID JUDGMENT OF HONBLE DELHI HIGH COURT WE REJECT REVENUES GROUNDS OF APPEAL FOR BOTH THE ASSESSMENT YEARS PROVIDED THE ASSESSEE HAS OFFERED THE AMOUNT OF INTEREST ON DUE DATE BASI S IN THE ASSESSMENT YEARS INVOLVED. 32. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE REJECT REVENUES GROUNDS OF APPEAL. 33. IN THE RESULT, THIS GROUND IS DISMISSED. 34. GROUND NO. 2 READS AS UNDER: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION O F RS. 123114/- ON ACCOUNT OF EXPENDITURE OF SOFTWARE. 35. BRIEF FACTS APROPOS THIS ISSUE ARE THAT THE ASS ESSEE HAD CLAIMED RS. 1,64,152/- BEING EXPENDITURE INCURRED ON SOFTWARE, AS REVENUE EXPENDITURE. THE AO TREATED THIS EXPENDITURE AS CAPITAL EXPENDIT URE AND ALLOWED DEPRECIATION @ 25%. THUS, HE MADE A DISALLOWANCE O F RS. 1,23,114/-. 36. LD. CIT(A) DELETED THE DISALLOWANCE TREATING TH E ENTIRE EXPENDITURE IN REVENUE FIELD KEEPING IN VIEW THE RAPID TECHNOLOGIC AL DEVELOPMENTS IN THE FIELD OF INFORMATION TECHNOLOGY. 37. HAVING HEARD BOTH THE PARTIES, WE FIND THAT THI S ISSUE IS ALSO COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF TRIBUNAL I N ASSESSEES OWN CASE FOR AY 1997-98, THE COPY OF WHICH IS CONTAINED AT P AGE 1 TO 11 OF PAPER ITA NOS. 3200 & 3198/D/2004 17 BOOK REPORTED IN 106 TTJ 65 (DEL.) [2007], WHEREIN TRIBUNAL IN PARA 26 HAS OBSERVED AS UNDER: - 26. FOR AY 1997-98 REVENUE HAS TAKEN ONE MORE GROUND OF APPEAL I.E. ALLOWANCE OF THE SUM OF RS. 13,05,965 ON SOFTWARE THAT HAD BEEN TREATED BY THE LD. AO TO BE CAPITAL EXPENDITURE. ON CONSIDERATION OF THE MATTER WE SEE NO FORCE AT AL I N THE CONTENTION OF THE REVENUE. IT IS WELL-KNOWN TH AT SOFTWARE IS A FIELD OF FAST CHANGING TECHNOLOGY AND NEEDS UPDATE AND UPGRADATION RECURRENTLY AND MAY AT TIMES LESS THAN ONE YEAR. IT IS NOT THE CAS E OF THE REVENUE THAT ANY SPECIAL SOFTWARE HAS BEEN DEVELOPED FOR PARTICULAR NEEDS OF THE ASSESSEE ONLY. WE, THEREFORE, FIND NO REASON TO INTERFERE I N THE IMPUGNED ORDER OF THE LD. CIT(A) IN THIS BEHALF . ACCORDINGLY THIS GROUND OF APPEAL IS REJECTED. 38. LD. COUNSEL FURTHER POINTED OUT THAT THE ORDER OF THE TRIBUNAL HAS BEEN UPHELD BY HONBLE DELHI HIGH COURT, WHEREIN HO NBLE DELHI HIGH COURT HAS OBSERVED AS UNDER: - THE ONLY QUESTION THAT HAS ARISEN IN THIS CASE PERTAINING TO THE AY 1997-98 IS THAT EXPENDITURE INCURRED BY THE ASSESSEE ON SOFTWARE WAS TREATED BY THE AO AS CAPITAL EXPENDITURE. THE TRIBUNAL WAS OF THE VIEW THAT DUE TO TECHNOLOGICAL CHANGES AND THE NEED TO UPGRADE THE SOFTWARE ON A REGULAR BASIS IT CANNOT BE SAID THAT THE SOFTWARE WAS OF AN ENDURING NATURE. WE ARE INFORMED THAT THE SOFTWARE FOR WHICH THE EXPENDITURE WAS INCURRED WAS MS OFFICE, WHICH IS NOT A CUSTOM BUILT SOFTWARE FOR THE ASSESSEE AND IT IS COMMON KNOWLEDGE THAT THIS SOFTWARE REQUIRES REGULAR UPGRADATION. WE CAN UNDERSTAND THAT WHERE CUSTOMIZED SOFTWARE IS PREPARED, THEN IT COULD BE OF AN ENDURING NATURE, BUT IN THIS CASE MS OFFICE IS NOT CUSTOMIZED SOFTWARE AND IT CANNOT BE SAID THAT THE SOFTWARE DOES NOT REQUIRE FREQUENT UPGRADATION. WE ARE OF THE VIEW THAT THERE IS NO ERROR COMMITTED BY THE TRIBUNAL IN TAKING THE VIEW THAT I T DID. ITA NOS. 3200 & 3198/D/2004 18 39. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT(SUPRA) THIS GROUND IS DISMISSED. 40. GROUND NO. 3 READS AS UNDER: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DIRECTING THE AO TO ALLOW THE SUM OF RS. 4578232/- BEING THE INCOME OF EARLIER YEARS REVERSED, AS BAD DEBT MERELY BY VERIFYING WHETHER IT WAS RECEIVED EARLIER OR NOT, WITHOUT EXAMINING WHETHER ALL THE CONDITIONS TO ALLOW THE DEDUCTION WERE SATISFIED OR NOT, INCLUDING VERIFICATION TO DETERMINE WHETHER THE DEBT WAS BAD. 41. THIS GROUND IS IDENTICAL TO GROUND NO. 2 OF ASS ESSEES APPEAL. 42. WE HAVE ALREADY ACCEPTED THE ASSESSEES PLEA TH AT THE RBI PRUDENTIAL NORMS WILL TAKE PRECEDENCE OVER SECTIO N 145 OF INCOME TAX ACT AND, THEREFORE, ASSESSEE WAS ENTITLED TO REVERS AL OF INTEREST INCOME RECOGNIZED IN EARLIER YEARS IN RESPECT OF ASSETS WH ICH BECAME NON- PERFORMING AFTER RECOGNITION OF INCOME FROM THE SAI D ASSETS. HOWEVER, THE DEPARTMENT IS AGGRIEVED WITH THE FINDINGS OF LD. CI T(A) THAT THE ASSESSEES CLAIM IS TO BE ALLOWED WITH REFERENCE TO SECTION 36 (1)(VII). SINCE, WE HAVE ALREADY ALLOWED THE ASSESSEES CLAIM, THEREFORE, TH E DISCUSSION, ON THIS ISSUE NOW WILL ONLY BE ACADEMIC. HOWEVER, WE FIND THAT THE CLAIM OF ASSESSEE U/S 36(1)(VII) IS NOT TENABLE IN VIEW OF T HE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGY, 3 20 ITR 577, WHEREIN THE HONBLE SUPREME COURT HAS OBSERVED AT PAGES 606 AND 609 AS UNDER: - ONE OF THE CONTENTIONS RAISED ON BEHALF OF NBFC BE FORE US WAS THAT IN THIS CASE THERE IS NO SCOPE FOR ADD BACK OF THE PROVISION AGAINST NPA TO THE TAXABLE INCOME OF THE ASSESSEE. WE FIND NO MERIT IN THIS CONTENTION. UN DER THE INCOME-TAX ACT, THE CHARGE IS ON PROFITS AND GAINS, NOT ON GROSS RECEIPTS (WHICH, HOWEVER, HAS PROFITS EMBEDDE D IN IT). THEREFORE, SUBJECT TO THE REQUIREMENTS OF THE I.T. ACT, ITA NOS. 3200 & 3198/D/2004 19 THE PROFITS TO BE ASSESSED UNDER THE I.T. ACT HAVE GOT TO BE REAL PROFITS WHICH HAVE TO BE COMPUTED ON ORDINA RY PRINCIPLES OF COMMERCIAL ACCOUNTING. IN OTHER WORD S, THE PROFITS HAVE GOT TO BE COMPUTED AFTER DEDUCTING LOSSES/EXPENSES INCURRED FOR BUSINESS, EVEN THOUGH SUCH LOSSES/EXPENSES MAY NOT BE ADMISSIBLE UNDER SECTION S 30 TO 43D OF THE INCOME TAX ACT, UNLESS SUCH LOSSES/EXPENSES ARE EXPRESSLY OR BY NECESSARY IMPLI CATION DISALLOWED BY THE ACT. THEREFORE, EVEN APPLYING TH E THEORY OF REAL INCOME, A DEBIT WHICH IS EXPRESSLY DISALLOWED BY THE EXPLANATION TO SECTION 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 PRINCIPLES BUT SUBJECT TO THE PROVISIONS OF THE INCOME-TAX ACT. UNDER SECTION 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 OFF IN CONTRADISTINCTION TO THE PROVISION FOR DOUBTFUL DEBT. THEREFORE, THIS GROUND IS ALLOWED ONLY FOR STATISTI CAL PURPOSES. 43. IN THE RESULT, DEPARTMENTS APPEAL IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. 44. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 07/09/2012 SD/- SD/- (A.D. JAIN) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 07/09/12 *KAVITA ITA NOS. 3200 & 3198/D/2004 20 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER DEPUTY REGISTRAR