KMF Ltd., New Delhi V. ACIT, New Delhi

ITA 3446/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61638 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 02-03-2016
• Assessment Year: 1997-1998
• Appeal Filed On: 06-07-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR KEDIA
• Assessee Lawyers: ASHISH CHADHA
• Keywords: Gift; Question of law; Bad and doubtful debts; Notional interest; Revenue expenditure; Capital expenditure
• Section: 143(3); 260A; 145; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D, NEW DELHI BEFORE SHRI I.C. SUDHIR, JM AND SHRI L.P. SAHU, AM ITA NO.3446/DEL/2011 : ASSTT. YEAR : 1997-98 KMF LTD. IIIRD FLOOR, 1019, ARYA SAMAJ RD, KAROL BAGH, NE WDELHI. VS ACIT CIRCLE 5(1) NEW DELHI. (APPELLANT) (RESPONDENT) PAN NO. AABCK8002C ASSESSEE BY : SH. VED JAIN, ADV. & ASHISH CHADHA, C A REVENUE BY : SH. RAJESH KUMAR KEDIA, DR DATE OF HEARING : 02.03.2016 DATE OF PRONOUNCEMENT : 19.05.2016 ORDER PER L.P. SAHU, AM: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE LD. CIT(A)-VIII, NEW DELHI ORDER DATED 4 TH MAY, 2011 FOR THE A.Y. 1997-98 ON THE FOLLOWING GROUNDS: 1A.THE LD. ASSTT. COMMISSIONER OF INCOME TAX HAS E RRED IN TREATING THE APPELLANT COMPANY AS A NON NBFC WHEREA S RESERVE BANK OF INDIA IN ITS LETTER HAS GIVEN NBFC STATUS TILL ITS CANCELLATION. 1B. THE LD. ACIT HAS ERRED IN TREATING THE PROVISIO NS OF SECTION 145 AS BEING OVER-RIDING ON THE GUIDELINES OF RESER VE BANK OF INDIA. 2. THE LD. ACIT HAS ERRED IN NOT REDUCING THE AMOUN TS WHICH HAVE ALREADY BEEN SUBJECTED TO TAX IN THE SUBSEQUEN T YEAR ON REALIZATION OF NON-PERFORMING ASSETS. 3. THE LD. ACIT HAS ERRED IN NOT ALLOWING THE BALAN CE NON- PERFORMING ASSETS AS BAD DEBTS AS THE SAME HAVE NOT BEEN RECOVERED AND HENCE ARE ALLOWABLE AS BAD DEBTS U/S 36 OF THE INCOME TAX ACT. 2 4. THE LD. ACIT HAS ERRED IN DISALLOWING PUBLIC ISS UE EXPENDITURE AMOUNTING TO RS. 9,92,229/- TREATING TH E SAME AS CAPITAL EXPENDITURE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE APPELLA NT IS A PUBLIC LIMITED COMPANY INCORPORATED UNDER THE PROVISIONS OF THE CO MPANIES ACT, 1956. THE APPELLANT WAS ENGAGED IN THE BUSINESS OF LEASING, HIRE PURCHASE AND FINANCING. THE APPELLANT FILED RETURN OF INCOME FOR THE SAID A.Y. 1997-98 DECLARING LOSS OF RS. 1,05,23,210/-. A SEARCH WAS CONDUCTED U/S 132(1) AGAINST THE APPELLANT FROM 25/ 06/1997 AND INCOME WAS ASSESSED BY JCIT, SPL. RANGE 7, NEW DELHI ON 18 /07/2000 ASSESSING THE LOSS AT RS. 1,00,71,830/-. 2.1 GROUND NOS. 1 TO 3 ARE REGARDING SIMILAR ISSUES . THEREFORE, WE ARE DECIDING TOGETHER. 3. SUBSEQUENTLY THE CASE WAS REOPENED U/S 148 AND A SSESSED THE SAME U/S 144/147 ON 19/11/2003 AT A LOSS OF RS. 37,94,84 8/- BY MADE AN ADDITION OF RS. 52,84,753/- TOWARDS LEASE RENTAL/FI NANCE CHARGES/INTEREST INCOME ON NON PERFORMING ASSETS DUE TO ASSESSEE WAS NEITHER NON BANKING FINANCIAL CORPORATION (HEREINAFTER REFERRED TO AS NBFC) REGISTERED WITH RESERVE BANK OF INDIA (HEREINAFTER REFERRED TO AS RBI) NOR PUBLIC FINANCIAL INSTITUTION NOR A SCHEDULED BA NK, NOR A PUBLIC COMPANY AS MENTIONED U/S 43D OF THE ACT. 3 4. THE LD. ASSESSING OFFICER ALSO DISALLOWED THE PU BLIC ISSUE EXPENDITURE OF RS. 9,92,229/- WHICH WERE IN THE NAT URE OF DEFERRED REVENUE EXPENDITURE. 5. AGAINST THE ABOVE ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A)-VIII, NEW DELHI WHICH WERE DECIDED IN FA VOUR OF THE APPELLANT BY ORDER DT. 04/01/2006 IN APPEAL NO. 115 /2004-05. THE REVENUE PREFERRED AN APPEAL BEFORE THE ITAT WHICH S ET ASIDE THE ASSESSMENT ORDER DT. 11/07/2008. SUBSEQUENTLY, FRE SH ASSESSMENT U/S 143(3) WAS PASSED BY THE ASSTT. COMMISSIONER OF INC OME TAX HAS AGAIN ADDED THE INCOME IN RESPECT OF NON-PERFORMING ASSET S AND SHARE ISSUE EXPENSES AS STATED (SUPRA). THE GROUNDS FOR MAKING THE ABOVE ADDITIONS WERE THAT THE APPELLANT COMPANY IS NOT AN NBFC AND IN TERMS OF SEC. 145 THE INCOME OF NON-PERFORMING ASSETS WAS ADDED. 6. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) AND CIT(A) UP HELD THE ORDER OF THE ASSESSING OFFICER. 7. AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE ASS ESSEE PREFERRED AN APPEAL BEFORE THE TRIBUNAL. 8. THE APPELLANT WAS CARRYING ON THE BUSINESS OF NB FC AND REGULARLY FILING RETURN WITH RESERVE BANK OF INDIA AS PER GUI DELINES. THERE WAS AN AMENDMENT ON JANUARY, 1997 IN THE RESERVE BANK OF I NDIA ACT, 1934 AND OF EXISTING NBFCS HAD TO APPLY FOR A CERTIFICAT E OF REGISTRATION. IN THIS REGARD A PRESS RELEASE WAS PUBLISHED BY THE RB I ON MAY 09, 1997. 4 THE COMPANY APPLIED FOR THE SAME ON 23/06/1997 WHIC H WAS REJECTED VIDE ORDER DT. 31/12/1998 STATING THAT THE COMPANY CANNOT TRANSACT THE BUSINESS OF NBFC FROM THE DATE OF REJECTION AND A L ETTER WAS ALSO FORWARDED TO THIS COMPANY ON 07/01/1999 BEARING LET TER NO. DNBS.ND.NO.____/05-4.4.3443/98-99 WHICH HAS BEEN PL ACED ON THE PAPER BOOK AT PG. NO. 76. 9. DURING THE COURSE OF HEARING HE SUBMITTED A SYNO PSIS WHICH CONTAINS TOTAL PAGE NOS. 20 IN WHICH RELEVANT PART IS REPRODUCING HEREUNDER: 13. THE ASSESSING OFFICER HAS MADE THE ADDITION ON TWO GROUNDS. ONE IS THAT, THE ASSESSEE COMPANY WAS NOT AN NBFC DURING THE PERIOD UNDER CONSIDERATION. THE SE COND GROUND IS THAT INCOME TAX PROVISIONS OF SECTION 145 WILL HAVE OVERRIDING EFFECT ON THE RBI NORMS. THE FIRST CONTENTION OF ASSESSING OFFICER IS FACTUALLY INCORR ECT. THE ASSESSEE COMPANY WAS INCORPORATED ON 14.01.1986 AND SINCE THEN IT IS ENGAGED AS NBFC BUSINESS. BEING N BFC IT WAS LEGALLY BOUND TO FOLLOW RBI DIRECTIONS. RBI HAS BEEN REGULATING NBFC SINCE 1963. 14. PRIOR TO THAT, THE BUSINESS TRANSACTED BY THE B ANKING COMPANIES WAS REGULATED BY THE BANKING REGULATION A CT, 1949. SINCE NON-BANKING COMPANIES STARTED RECEIVIN G DEPOSITS FROM GENERAL PUBLIC ON A LARGE SCALE, IT B ECAME NECESSARY TO MAKE SUITABLE PROVISIONS FOR REGULATIN G THE SAME. THE RESERVE BANK OF INDIA ACT, 1934 (THE AC T) WAS AMENDED BY ACT NO. 55 OF 1963 AND CHAPTER III-B [SECTIONS 45(H) TO 45 (Q)] WHICH CONTAINS PROVISION S RELATING TO NON-BANKING INSTITUTIONS RECEIVING DEPO SITS AND FINANCIAL INSTITUTIONS WAS INSERTED IN THE ACT. IN SECTION 45-1 OF THE ACT VARIOUS EXPRESSIONS, VIZ., COMPANY , CORPORATION, DEPOSIT, FINANCIAL INSTITUTION, FIRM AND NON-BANKING INSTITUTION WERE DEFINED. SECTION 45 J OF THE ACT EMPOWERED THE BANK TO REGULATE OR PROHIBIT THE ISSUE OF PROSPECTUS OR ADVERTISEMENT BY A NON-BANKING 5 INSTITUTION SOLICITING DEPOSITS OF MONEY FROM THE P UBLIC. 45K OF THE ACT ENABLED THE RBI TO COLLECT INFORMATI ON FROM NON-BANKING INSTITUTIONS AS TO DEPOSITS AND TO GIVE DIRECTIONS TO SUCH INSTITUTIONS. SECTION 45L OF TH E ACT EMPOWERED THE RBI TO CALL FOR INFORMATION FROM FINA NCIAL INSTITUTIONS AND TO GIVE DIRECTIONS TO SUCH INSTITU TIONS. SECTION 45Q PROVIDES THAT THE PROVISIONS OF CHAPTER III-B SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING INCONSIS TENT THEREWITH CONTAINED IN ANY OTHER LAW FOR THE TIME B EING IN FORCE OR ANY INSTRUMENT HAVING EFFECT BY VIRTUE OF ANY SUCH LAW. 15. AFTER THE INSERTION OF CHAPTER III-B IN THE ACT , THE RBI TIME TO TIME, ISSUED SETS OF DIRECTIONS TO REGU LATE ACCEPTANCE OF DEPOSITS BY NON-BANKING COMPANIES, CATEGORIZING THEM INTO FINANCIAL, NON-FINANCIAL AND MISCELLANEOUS COMPANIES. NON-BANKING FINANCIAL COMPANIES (RESERVE BANK) DIRECTIONS, 1966 RELATED T O COMPANIES [OTHER THAN AN INSURANCE COMPANY, OR STOC K EXCHANGE OR STOCK BROKING COMPANY] ENGAGED IN HIRE- PURCHASE FINANCE, HOUSING FINANCE, INVESTMENTS, LOA N EQUIPMENT LEASING, MUTUAL BENEFIT BUSINESS, ETC. N ON- BANKING NON-FINANCIAL COMPANIES (RESERVE BANK) DIRECTIONS, RELATED TO A COMPANY WHICH WAS NOT A BA NKING COMPANY NOR A FINANCIAL COMPANY REFERRED TO ABOVE. MISCELLANEOUS NON-BANKING COMPANIES (RESERVE BANK) DIRECTIONS, 1973 RELATED TO A COMPANY ENGAGED IN TH E BUSINESS OF COLLECTING MONEYS IN ONE LUMP SUM OR OTHERWISE BY SALE OF UNITS, CERTIFICATES OR OTHER INSTRUMENTS AND UTILIZING THE MONEYS SO COLLECTED F OR GIVING TO A SPECIFIED NUMBER OF SUBSCRIBERS BY LOT OR DRAW, PRIZES OR GIFTS, ETC. AND REFUNDING THE MONEY WITH OR WITHOUT INTEREST TO THOSE WHO HAVE NOT WON ANY PRIZ E, ETC., OR CONDUCTING ANY OTHER FORM OF CHIT OR KURI OR ANY OTHER SIMILAR BUSINESS. 16. AFTER THE ISSUANCE OF THE MISCELLANEOUS NON- BANKING COMPANIES (RESERVE BANK) DIRECTIONS, 1973, THE RBI, IN 1977 ISSUED THE MISCELLANEOUS NON-BANKING COMPANIES (RESERVE BANK) DIRECTIONS, 1977 AND THE NON-BANKING FINANCIAL COMPANIES (RESERVE BANK) DIRECTIONS, 1977. 6 17. IN THE YEAR 1992-93, RBI ISSUED DIRECTION TO AL L THE NBFCS WHOSE NOT OWNED FUND WAS RS. 50 LACS AND ABOVE TO SUBMIT INFORMATION FOR REGISTRATION. THE ASSESSEE COMPANY RECEIVED LETTER ON 12.04.1993 FROM RBI IN THIS REGARD. THE ASSESSEE COMPANY SUBMITTED THE NECESSARY INFORMATION VIDE LETTER DATED 17.09.1994 AND WAS GRANTED REGISTRATION VIDE LETTER DATED 18.04.19 96. 18. THEREAFTER CRB CAPITAL EPISODE HAPPENED AND RBI ACT WAS AMENDED. THE RBI ASKED FOR FRESH REGISTRAT ION BY ALL NBFCS. THE FRESH APPLICATION GOT REJECTED A ND THE LETTER WAS SERVED ON 07.01.1999. THUS, THE ASSESSE E COMPANY WAS NBFC TILL THEN. THESE FACTS CLEARLY ST ATED IN RBI NOTIFICATION DATED 09.05.1997 (PB PG. 58). THUS, THE ASSESSING OFFICER IS FACTUALLY INCORRECT IN HOL DING THAT THE ASSESSEE COMPANY IS NOT NBFC DURING THE RELEVAN T YEAR. 19. AS REGARD TO THE SECOND ISSUE, THE SAME IS COVE RED BY SUPREME COURT JUDGMENT WHERE BINDING EFFECT OF T HE DIRECTIONS ISSUED BY RBI TO REGULATE THE NBFCS WAS EXAMINED. HONBLE SUPREME COURT IN THE CASE OF PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD. VS. RESERVE BANK OF INDIA [1992 (2) SCC 343, 1992 AIR 1033] WHEREIN IT WAS HELD AS UNDER: WE WOULD FIRST DEAL WITH THE LEGAL OBJECTIONS RAIS ED ON BEHALF OF THE PEERLESS AND OTHER COMPANIES. IT HAS BEEN SUBMITTED ON BEHALF OF THE PEERLESS AND OTHER COMPA NIES THAT THE DIRECTIONS OF 1987 ARE ULTRA VIRUS OF SECT ION 45J AND 45K OF THE RESERVE BANK OF INDIA ACT, 1934. NO NE OF THE SAID SECTIONS AUTHORIZES THE RESERVE BANK TO FR AME ANY DIRECTIONS PRESCRIBING THE MANNER OF INVESTMENT OF DEPOSITS RECEIVED OR THE METHOD OF ACCOUNTANCY TO B E FOLLOWED OR THE MANNER IN WHICH ITS BALANCE SHEET A ND BOOKS OF ACCOUNTS ARE TO BE DRAWN UP. IT HAS BEEN CONTENDED THAT SECTION 45J HAS NO MANNER OF APPLICA TION IN THE PRESENT CASE. SECTION 45K(3) OF THE ACT ON WHICH RELIANCE HAS BEEN PLACED ON BEHALF OF THE RESERVE B ANK, MERELY PROVIDES THAT THE RESERVE BANK MAY, IF IT CONSIDERS NECESSARY IN THE PUBLIC INTEREST SO TO DO , GIVE DIRECTIONS TO NON-BANKING INSTITUTIONS EITHER GENER ALLY OR TO ANY NON-BANKING INSTITUTIONS IN PARTICULAR, IN RESP ECT OF 7 ANY MATTERS RELATING TO OR CONNECTED WITH RECEIPTS OF DEPOSITS, INCLUDING THE RATE OF INTEREST PAYABLE ON SUCH DEPOSITS AND THE PURPOSE FOR WHICH DEPOSITS WILL BE RECEIVED. ACCORDING TO SEC. 45K(4) IF ANY NON-BANK ING INSTITUTION FAILS TO COMPLY WITH ANY DIRECTION GIVE N BY THE BANK UNDER SUB-S. (3) THE RESERVE BANK MAY PROHIBIT THE ACCEPTANCE OF DEPOSITS BY THAT NON-BANKING INSTITUT ION. IT IS THUS SUBMITTED THAT ON A PLAIN READING OF SEC. 4 5K(3) THE RESERVE BANK IS ONLY COMPETENT TO FRAME THE DIRECTIONS REGARDING RECEIPT OF DEPOSITS AND SUCH P OWER OF DIRECTION DOES NOT EXTEND TO PROVIDING THE MANNER I N WHICH DEPOSITS CAN BE INVESTED OR THE MANNER IN WHI CH THE LIABILITIES ARE TO BE DISCLOSED IN THE BALANCE SHEET OR BOOKS OF ACCOUNTS OF THE COMPANY. IT IS FURTHER SU BMITTED THAT THE POWER UNDER SUB-S. (4) IS TO PROHIBIT ACCE PTANCE OF DEPOSITS AND AS SUCH THE PERMISSIBLE FIELD OF DI RECTION MAKING IS LIMITED TO RECEIPT OF DEPOSITS AND NOTHIN G MORE. THE RESERVE BANK OF INDIA IN FRAMING THE DIRECTIONS OF 1987 WHICH IS A SUBORDINATE PIECE OF LEGISLATION HA S CLEARLY OVER-STEPPED THE BOUNDS OF THE PARENT STATU E OF SEC. 45K(3) OF THE ACT. IT IS FURTHER ARGUED THAT THE RESERVE BANK CANNOT CONTENDED THAT PARAGRAPHS 6 AND 12 OF THE DIRECTIONS OF 1987 ARE COVERED WITHIN THE POWERS CONFERRED ON THE RESERVE BANK UNDER SEC. 45L(1)(B) OF THE ACT. IT IS SUBMITTED THAT THE RESERVE BANK HAD AT NO POINT OF TIME EXPRESSED ITS INTENTION TO INVOKE ITS POWERS UNDER SEC. 45L. EVEN BEFORE THE DIVISION BENCH OF THE CALCUTTA HIGH COURT THE RESERVE BANK DID NOT RELY O N SEC. 45L AS ALLEGED SOURCE OF ITS POWER TO ISSUE THE IMP UGNED DIRECTIONS NOR THE RESERVE BANK REFERRED TO SEC. 45 L IN ITS PLEADINGS BEFORE THE HIGH COURT. WHEREVER THE RESE RVE BANK OF INDIA WANTED TO INVOKE ITS POWER UNDER SEC. 45L OF THE ACT, IT HAS EXPRESSLY MENTIONED THAT IT WAS EXERCISING ITS POWERS UNDER SEC. 45L. IN THE CASE OF NON BANKING FINANCIAL COMPANIES (RESERVE BANK) DIRECTIO NS 1977, OR THE MISCELLANEOUS NON BANKING COMPANIES (RESERVE BANK) DIRECTIONS, 1977 IT HAS EXPRESSLY SA ID THAT IT WAS INVOKING ITS POWERS UNDER SEC. 45L OF THE AC T, WHEREAS IN THE CASE OF THE IMPUGNED DIRECTIONS, THE RESERVE BANK HAS ONLY REFERRED TO SECTIONS 45J AND 45K 8 OF THE ACT. THE RESERVE BANK OF INDIA ITSELF IN TH E AFFIDAVIT FILED BEFORE THE HIGH COURT HAD STATED THAT THE DIR ECTIONS OF 1987 WERE FRAMED AFTER CAREFUL DELIBERATIONS AT THE HIGHEST LEVEL AND NOW IT CANNOT TAKE THE STAND THAT THE SOURCE OF ITS POWER IN FRAMING THE IMPUGNED DIRECTI ONS WAS EXERCISED UNDER SEC. 45L OF THE ACT. IT IS FUR THER CONTENDED THAT IN ORDER TO INVOKE THE POWERS U/S 45 L OF THE ACT IT HAS TO STATE THAT THE RESERVE BANK WAS S ATISFIED FOR THE PURPOSE OF ENABLING IT TO REGULATE THE CRED IT SYSTEM OF THE COUNTRY TO ITS ADVANTAGE AND IT WAS NECESSAR Y TO GIVE SUCH INSTITUTIONS DIRECTIONS RELATING TO THE C ONDUCT OF BUSINESS BY FINANCIAL INSTITUTION OR INSTITUTIONS. IN ORDER TO EXERCISE ITS POWER U/S 45L OF THE ACT, IT HAS TO AP PLY ITS MIND FOR THE PURPOSE OF ARRIVING AT THE STATUTORILY REQUIRED SATISFACTION. IN FACT, SUCH RECITAL IS NECESSARY S INCE SUCH SATISFACTION IS A PRE-CONDITIONS FOR THE RESERVE BA NK TO EXERCISE ITS POWERS U/S 45L OF THE ACT. ON THE OTH ER HAND IT HAS BEEN CONTENDED ON BEHALF OF THE RESERVE BANK THAT THE POWER OF THE RESERVE BANK TO REGULATE DEPOSIT ACCEPTANCE ACTIVITIES OF NON BANKING AND FINANCIAL INSTITUTIONS UNDER CHAPTER IIIB OF THE ACT CANNOT B E DISPUTED. THE RESERVE BANK HAS POWER TO ISSUE THE IMPUGNED DIRECTIONS U/S 45J, 45K AND 45L OF THE ACT . THE PITH AND SUBSTANCE OF PARA 6 OF THE DIRECTIONS OF 1987 IS TO ENSURE THAT DEPOSITS RECEIVED FROM THE PUBLIC ARE INVESTED IN A MANNER TO SECURE THE REPAYMENT OF THE DEPOSITS. A DEPOSIT IS, BY DEFINITION, A SUM OF MO NEY RECEIVED WITH A CORRESPONDING OBLIGATION TO REPAY T HE SAME. THUS, THE REPAYMENT OF THE DEPOSIT IS AN INT EGRAL PART OF THE TRANSACTION OF A RECEIPT OF DEPOSIT. I T IS CONTENDED THAT THE EXPRESSION RECEIPT OF DEPOSIT MUST BE CONSTRUED LIBERALLY, IN THE LIGHT OF THE NATURE OF THE PROVISIONS AS WELL AS IN THE LIGHT OF THE WIDE LANG UAGE USED IN THE PROVISION. IT IS ALSO ARGUED THAT EVEN IF THE IMPUGNED DIRECTIONS OF 1987 ARE NOT COVERED UNDER T HE POWERS CONFERRED UNDER SECTIONS 45J AND 45K OF THE ACT, THOSE ARE SQUARELY COVERED BY SECTION 45L OF THE AC T. IT IS SUBMITTED THAT VARIOUS PROVISIONS UNDER THE ACT ARE ENABLING IN NATURE AND CONFER OVERLAPPING POWERS. EVEN IF THERE IS NO RECITAL OF SEC. 45L, IT WOULD NOT BE OF MUCH 9 CONSEQUENCE, IF SUCH EXERCISE OF POWER CAN BE RELAT ED TO SEC. 45L OF THE ACT. WE HAVE CONSIDERED THE ARGUMENTS ADVANCED BY LD. COUNSEL FOR THE PARTIES. CHAPTER IIIB LAYING DOWN PROVISIONS RELATING TO NON BANKING INSTITUTIONS REC EIVING DEPOSITS AND FINANCIAL INSTITUTIONS WAS INSERTED IN THE RESERVE BANK OF INDIA ACT, 1934, BY VIRTUE OF ACT 5 5 OF 1963 W.E.F. 1.2.1964. SECTION 45J, 45K(3) & (4) AN D 45L 1(B) RELEVANT FOR OUR PURPOSE ARE GIVEN AS UNDER: SEC. 45J THE BANK MAY, IF IT CONSIDERS NECESSARY IN THE PUB LIC INTEREST SO TO DO, BY GENERAL OR SPECIAL ORDER,- (A) REGULATE OR PROHIBIT THE ISSUE BY ANY NON BANK ING INSTITUTION OF ANY PROSPECTUS OR ADVERTISEMENT SOLI CITING DEPOSITS OF MONEY FROM THE PUBLIC; AND (B) SPECIFY THE CONDITIONS SUBJECT TO WHICH ANY SUC H PROSPECTUS OR ADVERTISEMENT, IF NOT PROHIBITED, MAY BE ISSUED. SECTION 45K (1) (2) (3) THE BANK MAY, IF IT CONSIDERS NECESSARY IN THE PUBLIC INTEREST SO TO DO, GIVE DIRECTION TO NON BANKING IN STITUTIONS EITHER GENERALLY OR TO ANY NON BANKING INSTITUTION OR GROUP OF NON BANKING INSTITUTIONS IN PARTICULAR, IN RESPE CT OF ANY MATTERS RELATING TO OR CONNECTED WITH THE RECEIPT O F DEPOSITS, INCLUDING THE RATES OF INTEREST PAYABLE O N SUCH DEPOSITS, AND THE PERIODS FOR WHICH DEPOSITS MAY BE RECEIVED. (4) IF ANY NON BANKING INSTITUTION FAILS TO COMPLY WITH ANY DIRECTION GIVEN BY THE BANK UNDER SUB-SECTION (3), THE BANK MAY PROHIBIT THE ACCEPTANCE OF DEPOSITS BY THA T NON BANKING INSTITUTION. SECTION 45L (1) IF THE BANK IS SATISFIED THAT FOR T HE PURPOSE OF ENABLING IT TO REGULATE THE CREDIT SYSTEM OF THE COUNTRY TO ITS ADVANTAGE IT IS NECESSARY SO TO DO; IT MAY-( A). (C) GIVE TO SUCH INSTITUTIONS EITHER GENERALLY OR T O ANY SUCH INSTITUTION IN PARTICULAR, DIRECTIONS RELATING TO THE CONDUCT OF BUSINESS BY THEM OR BY IT AS FINANCIAL INSTITUTIONS OR INSTITUTION. A COMBINED READING OF THE 10 ABOVE PROVISIONS UNMISTAKABLY GOES TO SHOW THAT THE RESERVE BANK IF CONSIDERS NECESSARY IN THE PUBLIC I NTEREST SO TO DO CAN SPECIFY THE CONDITIONS SUBJECT TO WHIC H ANY PROSPECTUS OR ADVERTISEMENT SOLICITING DEPOSITS OF MONEY FROM THE PUBLIC MAY BE ISSUED. IT CAN ALSO GIVE DIRECTIONS TO NON BANKING INSTITUTIONS IN RESPECT O F ANY MATTERS RELATING TO OR CONNECTED WITH THE RECEI PT OF DEPOSITS, INCLUDING THE RATES OF INTEREST PAYABL E ON SUCH DEPOSITS, AND THE PERIODS FOR WHICH DEPOSITS MAY BE RECEIVED. THIS LATTER POWER FLOWS FROM SUB SEC. (3) OF SEC. 45K OF THE ACT. THE BANK UNDER TH IS PROVISION CAN GIVE DIRECTIONS IN RESPECT OF ANY MATTERS RELATING TO OR CONNECTED WITH THE RECEIPT O F DEPOSITS (EMPHASIS ADDED). IN OUR VIEW A VERY WIDE POWER IS GIVEN TO THE RESERVE BANK OF INDIA TO ISSU E DIRECTIONS IN RESPECT OF ANY MATTERS RELATING TO OR CONNECTED WITH THE RECEIPT OF DEPOSITS. IT CANNOT BE CONSIDERED AS A POWER RESTRICTED OR LIMITED TO RECE IPT OF DEPOSITS AS SOUGHT TO BE ARGUED ON BEHALF OF THE COMPANIES THAT UNDER THIS POWER THE RESERVE BANK WOULD ONLY BE COMPETENT TO STIPULATE THAT DEPOSITS CANNOT BE RECEIVED BEYOND A CERTAIN LIMIT OR THAT T HE RECEIPT OF DEPOSITS MAY BE LINKED WITH THE CAPITAL OF THE COMPANY. SUCH INTERPRETATION WOULD BE VIOLATIN G THE LANGUAGE OF SEC. 45K (3) WHICH FURNISHES A WIDE POWER TO THE RESERVE BANK TO GIVE ANY DIRECTIONS IN RESPECT OF ANY MATTERS RELATING TO OR CONNECTED WIT H THE RECEIPT OF DEPOSITS. THE RESERVE BANK UNDER TH IS PROVISION IS ENTITLED TO GIVE DIRECTIONS WITH REGAR D TO THE MANNER IN WHICH THE DEPOSITS ARE TO BE INVESTED AND ALSO THE MANNER IN WHICH SUCH DEPOSITS ARE TO B E DISCLOSED IN THE BALANCE SHEET OR BOOKS OF ACCOUNTS OF THE COMPANY. THE WORD ANY QUALIFYING MATTERS RELATING TO OR CONNECTED WITH THE RECEIPT OF DEPOSI TS IN THE ABOVE PROVISION IS OF GREAT SIGNIFICANCE AND IN OUR VIEW THE IMPUGNED DIRECTIONS OF 1987 ARE FULLY COVERED AND IN OUR VIEW THE IMPUGNED DIRECTIONS OF 1987 ARE FULLY COVERED U/S 45K(3) OF THE ACT, WHICH GIVES POWER TO THE RESERVE BANK TO ISSUE SUCH DIRECTIONS. AS A PROPOSITION OF LAW WE AGREE WITH THE 11 CONTENTION OF THE LD. COUNSEL FOR THE RESERVE BANK THAT WHEN AN AUTHORITY TAKES ACTION WHICH IS WITHIN ITS COMPETENCE, IT CANNOT BE HELD TO BE INVALID MERELY BECAUSE IT PURPORTS TO BE MADE UNDER A WRONG PROVIS ION, IF IT CAN BE SHOWN TO BE WITHIN ITS POWER UNDER ANY OTHER PROVISION. LD. COUNSEL IN THIS REGARD HAS PLACED R ELIANCE ON INDIAN ALUMINIUM COMPANY ETC. VS. KERALA STATE ELECTRICITY BOARD, [1976] 1 S.C.R. 70. IN OUR VIEW AS ALREADY HELD ABOVE, THE RESERVE BANK WAS COMPETENT AND AUTHORIZED TO ISSUE THE IMPUGNED DIRECTIONS OF 1987, IN EXERCISE OF POWERS CONFERRED U/S 45K(3) OF THE A CT. 20. IT IS PERTINENT TO MENTION THAT THE ABOVE SAID JUDGMENT WAS CAME BEFORE THE INSERTION TO SEC. 45 I A TO THE RBI ACT WHICH MANDATE THE WANT OF REGISTRATION FOR WORKING AS NBFC, AND THE SAID JUDGMENTS DECLARES TH AT THE DIRECTION ISSUED BY THE RBI ARE BINDING TO ALL NBFCS WHICH FALLS WITHIN THE DEFINITION AS DEFINED U/S 45 -1 OF THE ACT. 21. THE ASSESSEE IS A PUBLIC LIMITED COMPANY, INCORPORATED UNDER THE PROVISIONS OF COMPANIES ACT, 1956, AND ENGAGED IN THE BUSINESS OF LEASING, HIRE PURCHASE AND FINANCING. THE ASSESSEE WAS REGISTERE D AS MERCHANT BANKER WITH SEBI UNDER SECURITIES AND EXCHANGE BOARD OF INDIA (MERCHANT BANKERS) REGULATIONS, 1992, WITH EFFECT FROM 01.06.1996. TH E ASSESSEE ALSO GOT REGISTRATION NO. 2900158, WITH EF FECT FROM 12.04.1993, FROM RBI TO WORK AS NBFC. THEREFO RE, ASSESSEE WAS BOUND TO FOLLOW THE NBFCS PRUDENTIAL NORMS (RESERVE BANK) DIRECTIONS, 1998 WAS ISSUED BY RBI. 22. WITHOUT PREJUDICE TO ABOVE, IT IS SUBMITTED THA T, RELYING UPON THE LETTER DATED 16.12.2009 ISSUED BY ASST. GENERAL MANAGER, RBI LD. ASSESSING OFFICER HAS TAKE N A VIEW THAT THE ASSESSEE CANNOT BE TREATED AS NBFC. IN THIS REGARD IT IS SUBMITTED THAT, WHILE CANCELLING THE REGISTRATION THE ASSESSEE A LETTER DT. 07.01.1999 W AS ALSO ISSUED BY RBI WHERE BY RBI HAS GIVEN THE FOLLOWING DIRECTION TO THE ASSESSEE; 2. YOU SHOULD HOWEVER, NOTE THAT YOUR COMPANY WIL L STILL CONTINUE TO BE GOVERNED BY RELEVANT PROVISIONS OF R BI 12 ACT, 1934, AND VARIOUS DIRECTIONS/INSTRUCTIONS ISSU ED BY RBI FROM TIME TO TIME UNTIL SUCH TIME THE ACTIVITIE S OF NON BANKING FINANCIAL INSTITUTIONS LISTED IN THE MEMORA NDUM OF ASSOCIATION OF THE COMPANY ARE DELETED AND THE E NTIRE AMOUNT OF PUBLIC DEPOSITS HELD BY THE COMPANY IS FU LLY REPAID WITH INTEREST. 23. IN THIS REGARD IT IS SUBMITTED THAT WHENEVER RB I REJECTS/CANCELS THE REGISTRATION OF ANY NBFC, THE R BI ISSUES SIMILAR DIRECTIONS TO THE NBFC. FURTHER IT IS SUBMITTED THAT AS PER THE RATIO LAID DOWN BY THE HO NBLE SUPREME COURT IN THE CASE OF PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD. VS. RESERVE BANK OF INDIA (SUPRA) ALL THE NBFCS INCLUDING THE ASSESSEE IS BOUND TO FOLLOW THE DIRECTION ISSUED IN THE ABOVE SAID LETTE R, WHEREBY IT WAS DIRECTED THAT THE ASSESSEE COMPANY W ILL STILL CONTINUE TO BE GOVERNED BY RELEVANT PROVISION S OF RBI ACT 1934, AND VARIOUS DIRECTIONS/INSTRUCTIONS ISSUE D BY RBI FROM TIME TO TIME UNTIL SUCH TIME THE ACTIVITIE S OF NON BANKING FINANCIAL INSTITUTIONS LISTED IN THE MEMORA NDUM OF ASSOCIATION OF THE COMPANY ARE DELETED AND THE ENTI RE AMOUNT OF PUBLIC DEPOSITS HELD BY THE COMPANY IS FU LLY REPAID WITH INTEREST. 24. WITHOUT PREJUDICE TO THE ABOVE IT IS SUBMITTED THAT, SIMILAR LETTER ISSUED BY RBI, WHILE CANCELLING/REJE CTING THE REGISTRATION CAME FOR CONSIDERATION BY KOLKATA BENC H OF ITAT, IN THE CASE OF ASST. CIT VS. M/S ARCO IMPEX LTD. (ITA NO. 956/KOL/2009 DT. 03.02.2012) WHEREIN IT WA S HELD AS UNDER: 7. COMING TO GROUND NO. 2 & 3, IT IS DELETION OF ADDITION OF RS. 95,58,000/- ON NOTIONAL INTEREST. LD. CIT-D R SUBMITTED THAT REFERENCE TO PARA 3.3 AT PAGE 9 OF T HE ORDER OF LD. CIT(A) WHEREIN IT WAS OBSERVED THAT IN THE N OTES ON ACCOUNTS FOR THE YEAR ENDED 31.03.2002, IT HAS BEEN STATED THAT THE ASSESSEE MADE AN APPLICATION FOR REGISTRATION AS NON BANKING FINANCE COMPANY (NBFC) AND THE SAME IS PENDING BEFORE RESERVE BANK OF INDIA AN D THAT IS THE DECISION THAT THE STATUS OF THE ASSESSE E CANNOT BE TAKEN AS NON BANKING FINANCE INSTITUTION. HENCE , RBI DIRECTION NEED NOT BE FOLLOWED INCLUDING THE PRUDEN TIAL 13 NORMS AND GUIDELINES WHICH WOULD APPLY IN THE CASE OF NBFC. THEREFORE, THE INCLUSION OF NOTIONAL INTERES T ON NON PERFORMING ASSETS (NPA) MADE BY THE ASSESSING OFFICER IS JUSTIFIED, IS THE ARGUMENT OF LD. CIT-DR . 8. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER NEVER WENT TO CHALLENGE THE STATUS OF THE ASSESSEE I.E. NBFC BUT THE ASSESSING OFFICER REJECTED THE SUBMISSIONS OF THE ASSESSEE THAT IN VIEW OF THE GUIDELINES OF THE RBI, INTEREST ACCRUED THEREON DOES NOT ACCRUE ON NPAS AND THAT TH ESE DEBTS HAVE BEEN TAKEN TO NPA. IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE BEFORE, THEREFORE, INTEREST CANNOT BE ATTRIBUTED ON ACCOUNT OF THESE LOANS. HOWEVER, ASSESSING OFFICER WAS OF THE VIEW THAT ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING WHICH ALW AYS INVOLVE TAX LIABILITY. THE FACT THAT SUCH INCOME W AS NOT REALIZED SUBSEQUENTLY IS OF DIFFERENCE MATTER ALTOG ETHER. THEREFORE, ASSESSING OFFICER FOUND THAT ASSESSEE IS LIABLE TO INCLUDE INCOME ON THESE LOANS SINCE ASSESSEE FOL LOWS MERCANTILE SYSTEM OF ACCOUNTING AND ACCORDINGLY NOT IONAL INTEREST @ 18% PER ANNUM WHICH IS TO THE TUNE OF RS . 95,85,000/- WERE ADDED AS INCOME OF THE ASSESSEE. AGGRIEVED ON THIS, ON APPEAL TO THE LD. CIT(A), LD. COUNSEL FOUND THAT IN ASSESSEES OWN CASE IN THE IMMEDIATEL Y PRECEDING YEAR I.E. ASSESSMENT YEAR 2001-02, ITAT, E BENCH KOLKATA IN ITA NO. 1080/KOL/2005 VIDE ORDER D ATED 24.08.2005 HELD THAT THE ALLOWABILITY OF PROVISIONS OF NPA MADE AS PER RBI GUIDELINES WERE ACCEPTED BY THE TRIBUNAL BY ANSWERING THAT THE ASSESSEE WAS NBFC AN D WAS GUIDED BY THE RBI GUIDELINES AND DIRECTION. 9. BEFORE US ALSO, LD. DR RELIED THE ASSESSMENT ORD ER AND VEHEMENTLY ARGUED THAT UNLESS THE ASSESSEE IS A NBFC AND HAS STATED EARLIER THAT THE ASSESSEE HAS M ADE AN APPLICATION FOR REGISTRATION AS NBFC AND THE SAM E IS ENDING WITH RBI WHEN SUCH IS THE POSITION, ASSESSEE CANNOT BE TAKEN AS NBFC WHICH WAS GUIDED BY RBI GUIDELINES AND PRUDENTIAL NORMS. LD. DR, THEREFORE , SUBMITTED THAT THE ISSUE WILL GO BACK TO THE FILE O F THE ASSESSING OFFICER FOR VERIFICATION THAT NBFC WAS DO NE. 14 9.1 HOWEVER, OBJECTING TO THE ARGUMENT OF LD. CIT-D R, LD. COUNSEL SUBMITTED THAT IMMEDIATELY PRECEDING YE AR THE TRIBUNAL HAS ACCEPTED THAT ASSESSEE WAS A NBFC AND WAS GUIDED BY THE RBI GUIDELINES AND DIRECTIONS . FURTHER, LD. COUNSEL FOR THE ASSESSEE WOULD REFER T O THE RBI LETTER DATED 04.01.2005 WHEREBY THE RBI IN PARA 3 OF ITS LETTER PERMITTED THE ASSESSEE AS YOU SHOULD, H OWEVER, NOTE THAT YOUR COMPANY STILL CONTINUES TO BE GOVERN ED BY THE RELEVANT PROVISIONS OF THE RBI ACT, 1934 AND VA RIOUS DIRECTIONS/INSTRUCTIONS ISSUED BY RBI FROM TIME TO TIME AND THE ENTIRE AMOUNT OF PUBLIC DEPOSITS, IF ANY, H ELD BY YOUR COMPANY IS FULLY REPAID WITH INTEREST. HENCE AS PER LD. COUNSEL THE PRUDENTIAL NORMS OF RBI HAS TO BE FOLLOWED BY THE ASSESSEE. FURTHER, LD. COUNSEL SUB MITTED THAT INCLUSION OF NOTIONAL INTEREST ON NPAS AS INCO ME OF THE ASSESSEE CANNOT BE TAKEN FOR CONSIDERATION BEFO RE THE TRIBUNAL IN THE CASE OF HILLTOP HOLDINGS INDIA LTD. IN ITA NO. 318/KOL/2006 DT. 10.08.2007 AND THE KOLKATA TRIBUNAL UPHELD THE DECISION OF THE LD. CIT(A) WHO DELETED THE ADDITION OF NOTIONAL INTEREST ON NPAS MADE BY T HE ASSESSING OFFICER IN THE ASSESSMENT. WHILE ARRIVIN G AT THE DECISION, TRIBUNAL RELIED THE DECISION IN THE C ASE OF APPEAL BEFORE THE JURISDICTIONAL HIGH COURT AND THE JURISDICTIONAL HIGH COURT DISMISSED THE APPEALS HOL DING THAT NO SUBSTANTIAL QUESTION OF LAW ARE INVOLVED. LD. COUNSEL FOR THE ASSESSEE, THEREFORE, SUBMITTED THAT NBFC STATUS ISSUE IS ONLY OF ACADEMIC AND THE ASSESSEE S TILL HAS TO CONTINUE TO FOLLOW THE PRUDENTIAL NORMS OF R BI. FURTHER, THE HONBLE JURISDICTIONAL HIGH COURT IN T HE CASE OF BRABOURNE INVESTMENTS LTD. IN ITA NO. 333 OF 200 7, WHILE ANSWERING THE SPECIFIC SUBSTANTIAL QUESTION O F LAW ON THE PROVISIONS FOR NPA THOUGH ASSESSEE COMPANY W AS NOT RECOGNIZED BY THE RBI, THE HONBLE CALCUTTA HIG H COURT HAS ANSWERED THE QUESTION IN FAVOUR OF THE ASSESSEE AND AGAINST REVENUE BY DISMISSING THE 260A APPEAL OF THE DEPARTMENT. THEREFORE, LD. COUNSEL SUBMITTED THAT NOW THE ISSUE IS COVERED BY CANTENA OF DECISIONS AND LD. COUNSEL FURTHER RELIED ON THE DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JCIT [2010] 320 ITR 577 (SC) AND 15 THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. VASISTH CHAY VYAPAR LTD. & OTHRS. [2011] 33 0 ITR 440 (DEL.). 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE PRECEDENTS. THE ASSESSING OFFICER WAS OF THE VIEW THAT ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG. THE INTEREST INCOME NOTIONALLY ACCRUED ON THE NON PERFORMING ASSET HAS TO BE TAKEN AS INCOME BY THE ASSESSEE THOUGH IT WAS NOT REALIZED DURING THE YEAR . THE ASSESSEE IS A NBFC HAS ALREADY BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING YEAR 2001-02. THEREFORE, THE ASSESSEE COMPANY IS TO FOLLOW THE PRUDENTIAL NORMS AND GUIDE LINES ISSUED BY RBI. THEREFORE, ASSESSING OFFICERS VIEW THAT IT WAS NOT OPEN TO THE ASSESSEE TO DECIDE NOT TO ACCOU NT FOR THE INTEREST ON LOANS. THE PRUDENTIAL GUIDELINES ISSUED BY RBI ARE TO BE T AKEN INTO CONSIDERATION IN ASSESSING THE TOTAL INCOME AN D FURTHER NO INTEREST ON NPAS COULD BE INCLUDED IN TH E TOTAL INCOME. DURING THE RELEVANT YEAR, ASSESSEE CARRIED ON NBFC ACTIVITIES AND THE INCOME FROM BUSINESS WAS ASSESSED. THE ASSESSEE HAS PAID INTEREST TAX FOR T HE AY 2000-01 VIDE ASSESSMENT ORDER DT. 14.03.2003, THE C OPY IS AVAILABLE IN ASSESSEES PAPER BOOK AT PAGE 55. THEREFORE, THE PRUDENTIAL ACCOUNTING NORMS ISSUED B Y THE RBI WERE STILL APPLICABLE. AS PER THE SAID NORMS, ASSESSEE COULD NOT RECOGNIZE INTEREST LOANS CLASSIF IED AS NPA. THEREFORE, WE ARE OF THE OPINION THAT THE MET HOD OF ACCOUNTING IS NOT THE SOLE DETERMINING FACTOR. THE INCOME TAX RECOGNIZES TWO METHODS OF ACCOUNTING I.E. CASH AND MERCANTILE BUT BOTH ACCOUNTING SUBJECT MATTER OF ASSESSMENT IS THE REAL INCOME. THE METHOD OF ACCOUNTING ONLY PRESCRIBES THE TIME FOR RECORDING A N ENTRY IN THE BOOKS OF ACCOUNT RELATING TO AN INCOME. THE ACCOUNTING PRINCIPLES, HOWEVER, HAVE TO BE APPLIED TO COMMERCIAL REALITIES AND, THEREFORE, IF NO INCOME A RISES IN REALITY THEN NO ADDITION IS PERMISSIBLE. THE DIREC TIONS AND INSTRUCTIONS ISSUED BY RBI INTRODUCING PRUDENTIAL ACCOUNTING NORMS BINDING ON THE ASSESSEE. FURTHERM ORE, 16 ASSESSEE IS CONSISTENTLY FOLLOWING THE DIRECTIONS O F RBI PRUDENTIAL NORMS AND, THEREFORE, ASSESSEE COULD NOT RECOGNIZE THE INTEREST ON LOANS CONSIDERED AS NA. THEREFORE, WE ARE OF THE VIEW THAT NO ADDITION OF I NTEREST WAS PERMISSIBLE ONLY BECAUSE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AS THE PRUDENTIAL N ORMS OF THE RBI AND NO INCOME IN REAL TERMS WAS CARRIED ADDITION WAS NOT PERMISSIBLE. HENCE, WE AGREE WITH THE FINDINGS OF THE LD. CIT(A). THEREFORE, GROUND NOS. 2 & 3 OF THE DEPARTMENT FAILS. 25. WITHOUT PREJUDICE TO ABOVE, IT IS SUBMITTED THA T, THERE WAS AN OCCASION BEFORE THE HONBLE DELHI HIGH COURT TO EXAMINE THE ISSUE THAT, WHETHER A COMPANY WHICH IS FUNCTIONING AS NBFC, BUT NOT REGISTERED WI TH RBI AS NBFC CAN TAKE RESCUE OF THE FACT THAT SINCE IT IS NOT REGISTERED WITH RBI AS NBFC HENCE NOT BOUND TO BE GOVERNED BY RBI ACT AND DIRECTIONS ISSUED BY RBI. 26. IN THE CASE OF ROCKLAND LEASING LTD. VS. RESERVE BANK OF INDIA [2003] 43 SCL 395 (DEL.), THE COMPANY HAD APPLIED FOR A CERTIFICATE OF REGISTRATION ON 3. 7.1997 UNDER THE PROVISIONS OF SEC. 45-IA(2) OF THE RBI AC T. THIS APPLICATION WAS REJECTED BY THE RBI ON 9 TH JUNE, 1998. IN TERMS OF SECTION 45MC(1)(B) OF THE RBI ACT, ROCKLAN D IS DISQUALIFIED FROM CARRYING ON THE BUSINESS OF AN NB FC. ON BEHALF OF COMPANY IT WAS ARGUED, THAT SINCE THE APPELLANT WAS NOT REGISTERED AS NBFC WITH RBI AND, THEREFORE, THE PROVISIONS OF SECTION 45-I(C ) & (F) WERE NOT APPLICABLE. IN THAT VIEW OF THE MATTER RBI HAD NO JURISDICTION OVER THE APPELLANT COMPANY AND THUS, I T COULD NOT GIVE ANY DIRECTIONS OR FILE ANY COMPANY PETITIO N. HONBLE HIGH COURT OBSERVED AS UNDER: 22. IN SO FAR AS THE ARGUMENT THAT THE APPELLANT IS NOT NBFC, WE MAY NOTICE THAT THE COMPANY JUDGE HAS REJECTED THIS ARGUMENT IN THE FOLLOWING MANNER: IT WAS CONTENDED BY THE LD. COUNSEL FOR ROCKLAND T HAT HIS CLIENT WAS NOT AN NBFC IN VIEW OF THE PROVISIONS OF SECTION 45-I OF THE RBI ACT. THIS ARGUMENT NEEDS T O BE SUMMARILY REJECTED. THERE IS NOTHING TO SUGGEST TH AT ROCKLAND WAS NOT CARRYING ON ANY BUSINESS OF FINANC ING OR THAT IT WAS NOT A FINANCIAL INSTITUTION. ON THE CONTRARY, 17 THESE FACTS ARE NOT DOUBTED. FURTHERMORE, IT WAS DISCOVERED BY THE RBI THAT EVEN AFTER THE BOARD OF DIRECTORS OF ROCKLAND HAD RESOLVED IN JANUARY, 1998 NOT TO ACCEPT FRESH DEPOSITS, ROCKLAND CONTINUED TO DO SO. THE FACT THAT ROCKLAND WAS MERCHANT BANKER RECOGNIZ ED BY THE SEBI AT THE RELEVANT TIME ALSO, DOES NOT DET RACT FROM THE CONCLUSIONS ARRIVED AT. IT IS POSSIBLE TH AT A MERCHANT BANKER, ROCKLAND WAS NOT ENTITLED TO FUNCT ION AS AN NBFC BUT THAT IT UNABASHEDLY CHOSE TO DO SO, CAN NOT BE USED BY IT TO ITS ADVANTAGE. SIMILARLY, THE CON TENTION OF LD. COUNSEL FOR ROCKLAND THAT DUE TO THE PROVISIONS OF SECTION 2(C )(XVI) OF THE INDUSTRIAL DEVELOPMENT BA NK OF INDIA ACT, 1964, HIS CLIENT CANNOT BE CLASSIFIED AS A FINANCIAL INSTITUTION OR AN NBFC HAS ONLY TO BE STA TED FOR OUTRIGHT REJECTION. THERE CAN, THEREFORE, BE NO DO UBT THAT THE WRIT PETITION FILED BY THE RBI AGAINST ROCKLAND IS MAINTAINABLE. 23. WE ARE IN AGREEMENT WITH THE AFORESAID OBSERVATIONS. COUPLED WITH THE FACT THAT THE COMPA NY HAS BEEN UNDER THE JURISDICTION OF RBI EVER SINCE ITS I NCEPTION AND IT VOLUNTARILY APPLIED FOR REGISTRATION AFTER A MENDMENT OF THE RBI ACT. ON SUCH A PLEA THAT IT HAD WITHDRA WN THE APPLICATION IT CANNOT AVOID THE RIGOURS OF LAW. 27. THE ISSUE INVOLVED IN GROUND NO. 2, 3 & 4 ARE SQUARELY COVERED WITH THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. VASISTH CHAY VYAPAR LTD. & OTHERS [2011] 330 ITR 440 (DEL) WHEREIN IT WAS HELD AS UNDER: 21. AS NOTED ABOVE, MR. SABHARWAL, ARGUED THAT TH E CASE OF THE ASSESSEE WAS TO BE DEALT WITH FOR THE P URPOSE 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 H ELD THAT EVEN UNDER THE INCOME TAX ACT, INTEREST INCOME HAD NOT ACCRUED. MOREOVER, THIS SUBMISSION OF MR.SABHA RWAL IS BASED ENTIRELY ON THE JUDGMENT OF THE SUPREME CO URT IN THE CASE OF SOUTHERN TECHNOLOGY [2010] 320 ITR 577. NO DOUBT, IN FIRST BLUSH, READING OF THE JUDGMENT GIVE S AN INDICATION THAT THE COURT HAS HELD THAT THE RBI ACT DOES NOT OVERRIDE THE PROVISIONS OF THE INCOME TAX ACT. 18 HOWEVER, WHEN WE EXAMINE THE ISSUE INVOLVED THEREIN MINUTELY AND DEEPLY IN THE CONTEXT IN WHICH THAT HA D 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 SUPREME C OURT, THE ASSESSEE A NBFC DEBITED RS. 81,68,516 AS PROVIS ION AGAINST NPA IN THE PROFIT AND LOSS ACCOUNT, WHICH W AS CLAIMED AS DEDUCTION IN TERMS OF SECTION 36(1)(VII) OF THE ACT. THE ASSESSING OFFICER DID NOT ALLOW THE DEDUC TION CLAIMED AS AFORESAID ON THE GROUND THAT THE PROVISI ON OF NPA WAS NOT IN THE NATURE OF EXPENDITURE OR LOSS BU T MORE IN THE NATURE OF A RESERVE, AND THUS NOT DEDUCTIBLE U/S 36(1)(VII) OF THE ACT. THE ASSESSING OFFICER, HOWE VER, DID NOT BRING TO TAX RS. 20,34,605 AS INCOME (BEING INC OME ACCRUED UNDER 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 A PEX COURT OBSERVED THAT IN SO FAR AS THE PERMISSIBLE DEDUCTIONS OR EXCLUSIONS UNDER THE ACT ARE CONCERNE D, THE SAME ARE ADMISSIBLE ONLY IF SUCH DEDUCTIONS/EXCLUSIONS SATISFY THE RELEVANT CONDITIO NS STIPULATED THEREFORE, UNDER THE ACT. TO THAT EXTEN T, IT WAS OBSERVED THAT THE PRUDENTIAL NORMS DO NOT OVERRIDE THE PROVISIONS OF THE ACT. HOWEVER, THE APEX COURT MAD E 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 FRO M THE MERCANTILE SYSTEM OF ACCOUNTING AND/OR SECTION 145 OF THE INCOME TAX ACT. IT CAN BE SAID, THEREFORE, THA T THE APEX COURT APPROVED THE REAL INCOME THEORY WHICH IS ENGRAINED IN THE PRUDENTIAL NORMS FOR RECOGNITION O F REVENUE BY NBFC. THE FOLLOWING PASSAGE FROM THE JUDGMENT OF THE APEX COURT WOULD BRING OUT THE DIST INCTION NOTICED BY THE APEX COURT BETWEEN PERMISSIBLE DEDUCTIONS/EXCLUSIONS, ON THE ONE HAND, AND INCOME RECOGNITION ON THE OTHER (PAGES 606 AND 609): 31. BEFORE CONCLUDING ON THIS POINT, WE NEED TO EMPHASIZE THAT THE 1998 DIRECTIONS HAS NOTHING TO D O WITH 19 THE ACCOUNTING TREATMENT OR TAXABILITY OF INCOME UNDER THE INCOME TAX ACT. THE TWO, VIZ., INCOME TAX ACT AND THE 1998 DIRECTIONS OPERATE IN DIFFERENT FIELDS. A S STATED ABOVE, UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, INTEREST HIRE CHARGES INCOME ACCRUES WITH TIME. IN SUCH CASES, INTEREST IS CHARGED AND DEBITED TO THE ACCOU NT OF THE BORROWER AS INCOME IS RECOGNIZED UNDER THE AC CRUAL SYSTEM. HOWEVER, IT IS NOT SO RECOGNIZED UNDER THE 1998 DIRECTIONS AND, THEREFORE, IN THE MATTER OF ITS PRE SENTATION UNDER THE SAID DIRECTIONS, THERE WOULD BE AN ADD BA CK BUT NOT UNDER THE INCOME TAX ACT NECESSARILY. IT IS IM PORTANT TO NOTE THAT COLLECT ABILITY IS DIFFERENT FROM ACCR UAL. HENCE, IN EACH CASE, THE ASSESSEE HAS TO PROVE, AS HAS HAPPENED IN THIS CASE WITH REGARD TO THE SUM OF RS. 20,34,605 THAT INTEREST IS NOT RECOGNIZED OR TAKEN INTO ACCOUNT DUE TO UNCERTAINTY IN COLLECTION OF THE INC OME. IT IS FOR THE ASSESSING OFFICER TO ACCEPT THE CLAIM OF THE ASSESSEE UNDER THE INCOME TAX ACT OR NOT TO ACCEPT IT IN WHICH CASE THERE WILL BE ADD BACK EVEN UNDER THE RE AL INCOME THEORY AS EXPLAINED HEREIN BELOW: 38. THE POINT TO BE NOTED IS THAT THE INCOME TAX A CT IS A TAX ON REAL INCOME, I.E., THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE INCOME TAX ACT. THEREFORE, IF BY THE EXPLANATION T O SEC. 36(1)(VII) A PROVISION FOR DOUBTFUL DEBT IS KEPT OU T OF THE AMBIT OF THE BAD DEBT WHICH IS WRITTEN OFF THEN, ON E HAS TO TAKE INTO ACCOUNT THE SAID EXPLANATION IN COMPUTATI ON OF TOTAL INCOME UNDER THE INCOME TAX ACT FAILING WHICH ONE CANNOT ASCERTAIN THE REAL PROFITS. THIS IS WHERE T HE CONCEPT OF ADD BACK COMES IN. IN OUR VIEW, A PRO VISION FOR NPA DEBITED TO PROFIT AND LOSS ACCOUNT UNDER TH E 1998 DIRECTIONS IS ONLY A NOTIONAL EXPENSE AND, THEREFOR E, THERE WOULD BE ADD BACK TO THAT EXTENT IN THE COMPUTATION OF TOTAL INCOME UNDER THE INCOME TAX ACT. 39. ONE OF THE CONTENTIONS RAISED ON BEHALF OF THE NBFC BEFORE US WAS THAT IN THIS CASE THERE IS NO SC OPE FOR ADD BACK OF THE PROVISION AGAINST NPA TO THE TAXABLE INCOME OF THE ASSESSEE. WE FIND NO MERIT IN THIS CONTENTION. UNDER THE INCOME TAX ACT, THE CHARGE I S ON PROFITS AND GAINS, NOT ON GROSS RECEIPTS (WHICH, HO WEVER, 20 HAS PROFITS EMBEDDED IN IT). THEREFORE, SUBJECT TO THE REQUIREMENTS OF THE INCOME TAX ACT, PROFITS TO BE ASSESSED UNDER THE INCOME TAX ACT HAVE GOT TO BE RE AL PROFITS WHICH HAVE TO BE COMPUTED ON ORDINARY PRINC IPLES OF COMMERCIAL ACCOUNTING. IN OTHER WORDS, PROFITS HAVE GOT TO BE COMPUTED AFTER DEDUCTING LOSSES/EXPENSES INCURRED FOR BUSINESS, EVEN THOUGH SUCH LOSSES/EXPE NSES MAY NOT BE ADMISSIBLE UNDER SECTIONS 30 TO 43D OF T HE INCOME TAX ACT, UNLESS SUCH LOSSES/EXPENSES ARE EXPRESSLY OR BY NECESSARY IMPLICATION DISALLOWED BY THE ACT. THEREFORE, EVEN APPLYING THE THEORY OF REAL I NCOME, A DEBIT WHICH IS EXPRESSLY DISALLOWED BY EXPLANATIO N TO SECTION 36(1)(VII), IF CLAIMED, HAS GOT TO BE ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE BECAUSE THE SAID A CT SEEKS TO TAX THE REAL INCOME WHICH IS INCOME COMP UTED ACCORDING TO ORDINARY COMMERCIAL PRINCIPLES BUT SUB JECT TO THE PROVISIONS OF THE INCOME TAX ACT. UNDER SECTIO N 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 WRIT E OFF IN CONTRADISTINCTION TO THE PROVISION FOR DOUBTFUL DE BT. 40. APPLICABILITY OF SECTION 145. AT THE OUTSET, WE MAY STATE THAT IN ESSENCE RBI DIRECTIONS 1998 ARE PRUDENTIAL/PROVISIONING NORMS I SSUED BY THE RBI UNDER CHAPTER IIIB OF THE RBI ACT, 1934. THESE NORMS DEAL ESSENTIALLY WITH INCOME RECOGNITIO N. THEY FORCE THE NBFCS TO DISCLOSE THE AMOUNT OF NPA IN THEIR FINANCIAL ACCOUNTS. THEY FORCE THE NBFCS TO REFLECT TRUE AND CORRECT PROFITS. BY VIRTUE OF SECTION 4 5Q, AN OVERRIDING EFFECT IS GIVEN TO THE DIRECTIONS 1998 V IS--VIS INCOME RECOGNITION PRINCIPLES IN THE COMPANIES AC T, 1956. THESE DIRECTIONS CONSTITUTE A CODE BY ITSELF . HOWEVER, THESE DIRECTIONS 1998 AND THE INCOME TAX A CT OPERATE IN DIFFERENT AREAS. THESE DIRECTIONS 1998 HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THESE DIRECTIONS CANNOT OVERRULE THE PERMISSIBLE DEDUCTI ONS OR THEIR EXCLUSION UNDER THE INCOME TAX ACT. THE INCONSISTENCY BETWEEN THESE DIRECTIONS AND COMPANIE S ACT IS ONLY IN THE MATTER OF INCOME RECOGNITION AND PRESENTATION OF FINANCIAL STATEMENTS. THE ACCOUNTI NG 21 POLICIES ADOPTED BY AN NBFC CANNOT DETERMINE THE TAXABLE INCOME. IT IS WELL SETTLED THAT THE ACCOUN TING POLICIES FOLLOWED BY A COMPANY CAN BE CHANGED UNLES S THE ASSESSING OFFICER COMES TO THE CONCLUSION THAT SUCH CHANGE WOULD RESULT IN UNDERSTATEMENT OF PROFITS. HOWEVER, HERE IS THE CASE WHERE THE ASSESSING OFFIC ER HAS TO FOLLOW THE RBI DIRECTIONS 1998 IN VIEW OF SE CTION 45Q OF THE RBI ACT. HENCE, AS FAR AS INCOME RECOGN ITION IS CONCERNED, SECTION 145 OF THE INCOME TAX ACT HAS NO ROLE TO PLAY IN THE PRESENT DISPUTE. 22. WE HAVE ALSO NOTICED THE OTHER LINE OF CASES W HEREIN THE SUPREME COURT ITSELF HAS HELD THAT WHEN THERE I S A PROVISION IN OTHER ENACTMENT WHICH CONTAINS A NON OBSTINATE CLAUSE, THAT WOULD OVERRIDE THE PROVISION S OF THE INCOME TAX ACT. TRO VS. CUSTODIAN, SPECIAL COURT A CT, 1992 [2007] 293 ITR 369 (SC) IS ONE SUCH CASE APART FROM OTHER CASES OF DIFFERENT HIGH COURTS. WHEN TH E JUDGMENT OF THE SUPREME COURT IN SOUTHERN TECHNOLOG Y [2010] 320 ITR 577 IS READ IN MANNER WE HAVE READ, IT BECOMES EASY TO RECONCILE THE RATIO OF SOUTHERN TECHNOLOGY WITH TRO VS. CUSTODIAN, SPECIAL COURT AC T, 1992 [2007] 293 ITR 369 (SC). THUS, VIEWED FROM AN Y ANGLE, THE DECISION OF THE TRIBUNAL APPEARS TO BE C ORRECT IN LAW. THE QUESTION OF LAW IS THUS DECIDED AGAINS T THE REVENUE AND IN FAVOUR OF THE ASSESSEE. AS A RESULT , ALL THESE APPEALS ARE DISMISSED. 28. IN VIEW OF THE ABOVE, THE IMPUGNED ORDER OF CIT (A) IS LIABLE TO BE ALLOWED. 10. THE LD. DR RELIED ON THE ORDER OF THE LOWER AUT HORITIES AND HE FURTHER SUBMITTED THAT THE LOWER AUTHORITIES HAS MA DE A GOOD ORDER AND DOES NOT REQUIRE ANY INTERFERENCE IN HIS ORDERS. 11. AFTER HEARING BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIO NS OF LD. AR & PAPER BOOKS SUBMITTED CONTAINED PAGE NOS. 1 TO 76. 22 12. DURING THE COURSE OF HEARING, THE LD. AR SPECIF ICALLY POINTED OUT THAT PAGE NO. 57 TO 61 WHICH HAVE BEEN ISSUED BY TH E PRESS RELATION DIVISION OF RESERVE BANK OF INDIA, DATED 9 TH MAY, 1997 THE RELEVANT PART IS AS UNDER: NON-BANKING FINANCIAL INSTITUTIONS SUMMARY OF THE RECENT AMENDMENTS TO THE RBI ACT BACKGROUND THE ACTIVITIES OF NON BANKING FINANCIAL COMPANIES (NBFCS) WERE BEING REGULATED BY THE PROVISIONS OF CHAPTER IIIB OF THE RESERVE BANK OF INDIA ACT, 1934 (THE RBI ACT) FOR OVER THREE DECADES. THE EMPHASIS OF T HESE REGULATIONS WAS, HOWEVER, ON THE ACCEPTANCE OF DEPO SIT BY NBFCS MAINLY AS AN ADJUNCT TO MONETARY AND CREDI T POLICY. OVER THE YEARS, THESE COMPANIES HAVE BECOM E AN IMPORTANT SEGMENT IN THE FINANCIAL SYSTEM OF THE CO UNTRY. BESIDES, THERE HAS BEEN INTER-PERNETRATION OF THE M ARKETS, BOTH, BY BANKS AND NON BANKS RESULTING IN EROSION O F THE DISTINCTION BETWEEN THESE TWO KINDS OF INSTITUTIONS WITHIN THE GROUP OF FINANCIAL INSTITUTIONS. THESE DEVELOP MENTS HAVE RENDERED THE EXISTING REGULATORY FRAMEWORK INADEQUATE TO REGULATE THE ACTIVITIES OF NBFCS AND PROVIDE PROTECTION TO THE DEPOSITOR. WITH A VIEW, THEREFORE, TO EFFECTIVELY REGULATING THE NBFCS AND THEREBY IMPROVING THEIR FINANCIAL HEALTH AND VIABIL ITY, AN ORDINANCE EFFECTING COMPREHENSIVE CHANGES IN THE PROVISIONS OF CHAPTERS IIIB AND V OF THE RBI ACT WA S PROMULGATED BY THE GOVERNMENT OF INDIA ON JANUARY 9 , 1997. THE ORDINANCE HAS SINCE BEEN REPLACED BY THE RESERV E BANK OF INDIA (AMENDMENT) ACT, 1997. THE AMENDED A CT HAS ALSO MODIFIED THE PROVISIONS OF CHAPTER IIIC OF THE RBI ACT RELATING TO ACCEPTANCE OF DEPOSITS BY UNINCORPORATED BODIES. WHILE THE PROVISIONS OF CHA PTER 23 IIIB AND V HAVE COME INTO EFFECT FROM THE DATE OF T HE ORDINANCE, THAT IS JANUARY 9, 1997 THOSE RELATING T O CHAPTER IIIC ARE EFFECTIVE FROM APRIL 1, 1997. THE SALIENT FEATURES OF THE AMENDED ACT ARE SUMMARIZED BELOW: CHAPTER IIIB DEFINITION I. THE BUSINESS OF A NON BANKING FINANCIAL INSTITUTION IS DEFINED TO MEAN CARRYING ON THE BUSINESS OF A FINANCIAL INSTITUTION REFERRED TO IN CLAUSE (C ) OF SECTION 451 OF THE ACT AND INCLUDES BUSINESS OF A NON BANKING FINANCIAL COMPANY REFERRED TO IN CLAUSE (F) IBID. II. A COMPANY ENGAGED IN INDUSTRIAL ACTIVITIES OR AGRICULTURAL OPERATIONS AS ITS PRINCIPAL BUSINESS I S EXCLUDED FROM THE DEFINITION OF FINANCIAL INSTITUTION. III. A NON-BANKING FINANCIAL COMPANY HAS BEEN DEFINED TO MEAN: A) A FINANCIAL INSTITUTION WHICH IS A COMPANY; B) A NON BANKING INSTITUTION WHICH IS A COMPANY AND WHICH HAS AS ITS PRINCIPAL BUSINESS THE RECEIVING OF DEPOSIT UNDER ANY SCHEME OR ARRANGEMENT OR IN ANY OTHER MANNER, OR LENDING IN ANY MANNER; OR C) ANY OTHER NON BANKING INSTITUTION NOTIFIED BY THE RESERVE BANK. ENTRY POINT NORM 1. AN NBFC IS REQUIRED TO HAVE A CERTIFICATE OF REGISTRATION AND ALSO HAVE A NET OWNED FUND (NOF) OF NOT LESS THAN RS. 25 LAKH TO COMMENCE OR CARRY ON THE BUSINESS OF A NON BANKING FINANCIAL 073 INSTITUTION. THE RESERVE BANK, HOWEVER, CAN RAISE THE MINIMUM NOF REQUIREMENT UPTO RS. 2 CRORE. EVERY NBFC EXISTING AS ON JANUARY 9, 1997 IS 24 REQUIRED TO APPLY TO THE RESERVE BANK OF REGISTRATI ON BEFORE JULY 8, 1997. NBFCS WHICH ARE ALREADY REGISTERED WITH THE RESERVE BANK UNDER THE EARLIER GUIDELINES ARE ALSO REQUIRED TO APPLY TO THE RESERV E BANK AGAIN FOR REGISTRATION. NBFCS WHICH WERE IN EXISTENCE BEFORE JANUARY 9, 1997 WOULD BE ALLOWED TO CARRY ON THEIR BUSINESS UNTIL A CERTIFICATE OF REGISTRATION IS ISSUED TO THEM OR REJECTION OF THEI R APPLICATION FOR REGISTRATION IS COMMUNICATED TO THEM. NBFCS HAVING NOF OF LESS THAN RS. 25 LAKH AS ON JAN UARY 9, 1997 MAY CARRY ON THEIR ACTIVITIES BUT WILL BE R EQUIRED TO ATTAIN THE PRESCRIBED NOF OF RS. 25 LAKH WITHIN A P ERIOD OF THREE YEARS FROM THE DATE OF THE ORDINANCE. THE RE SERVE BANK MAY, FOR SUFFICIENT REASONS, EXTEND THIS TIME LIMIT BY ANOTHER THREE YEARS, SUBJECT TO THE CONDITION THAT SUCH NBFCS SHOULD INTIMATE ABOUT THEIR ATTAINING THE REQ UIRED NOF TO THE RESERVE BANK WITHIN THREE MONTHS FROM TH E DATE OF SUCH ATTAINMENT. THE RESERVE BANK IS EMPOWERED TO CANCEL THE CERTIFI CATE OF REGISTRATION ISSUED TO ANY NBFC FOR FAILURE ON THE PART OF THE NBFC TO FULFILL THE CONDITIONS AS LAID DOWN UND ER SECTION 45IA OF THE RBI ACT, 1934. A COMPANY, AGGR IEVED BY THE RESERVE BANKS ORDER OF REJECTION OF APPLICA TION OR CANCELLATION OF CERTIFICATE OF REGISTRATION MAY PRE FER AN APPEAL TO THE CENTRAL GOVERNMENT WITHIN A PERIOD OF 30 DAYS. 13. THE APPELLANT HAS APPLIED FOR A REGISTRATION AS A NON-BANKING FINANCIAL COMPANY ON DATED 23/06/1997 TO THE RESERV E BANK OF INDIA AS PER THE AMENDMENT AS STATED ABOVE UNDER THE RBI ACT . THE RBI PASSED A SPEAKING ORDER ON DATED 31/12/1998 FOR THE REJECT ION OF THEIR APPLICATION FOR REGISTRATION AS NBFC WHICH WAS COMM UNICATED TO THE 25 ASSESSEE ON JANUARY 07, 1999 WHICH HAS BEEN PLACED AT PAPER BOOK PAGE NO. 76. THE ASSESSEE COMPANY WAS CONTINUOUSLY CARR YING ON THE BUSINESS OF NON-BANKING FINANCIAL CORPORATION (NBFC ). THEREFORE, INCOME RECOGNITION COULD BE APPLIED AS PER PRUDENTI AL NORMS OF THE RBI AS PROVIDED. AS STATED ABOVE THERE IS A RELIEF THA T NBFCS WHICH WERE IN EXISTENCE BEFORE JANUARY 09, 1997 COULD BE ALLOW ED TO CARRY ON THEIR BUSINESS UNTIL A CERTIFICATE OF REGISTRATION IS ISS UE TO THEM ARE REJECTION OF THEIR APPLICATION FOR REGISTRATION IS COMMUNICATED TO THEM. IT IS CLEAR FROM THE ABOVE DIRECTIONS THAT THE APPELLANT COMPAN Y CAN CONTINUE THEIR BUSINESS AS PER NBFCS. THE APPELLANT HAD ADOPTED C ASH OF ACCOUNTING ONLY FOR INCOME OF NPA. THE ASSESSEE WAS ACTING AS NBFC WITH A PROVISIONAL REGISTRATION NO. 290.0158 W.E.F. 12/04/ 1993. THEREFORE, THE ASSESSEE ADOPTED SUCH A POLICY COMPLY THEIR CIRCULA R OF RBI DATED 19/06/1995. SECTION 43D OF THE INCOME TAX ACT HAS PROVIDED SPECIAL PROVISION IN CASE OF INCOME OF PUBLIC FINANCIAL INS TITUTIONS, PUBLIC COMPANIES ETC. 43D. SPECIAL PROVISION IN CASE OF INCOME OF PUBLIC FINANCIAL INSTITUTIONS, ETC. 3 NOTWITHSTANDING ANYTHING TO TH E CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS ACT, IN TH E CASE OF A PUBLIC FINANCIAL INSTITUTION OR A SCHEDULED BANK OR A STATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL INVESTM ENT CORPORATION, THE INCOME BY WAY OF INTEREST IN RELAT ION TO SUCH CATEGORIES OF BAD OR DOUBTFUL DEBTS AS MAY BE PRESC RIBED HAVING REGARD TO THE GUIDELINES ISSUED BY THE RESER VE BANK OF INDIA IN RELATION TO SUCH DEBTS, SHALL BE CHARGEABL E TO TAX IN THE 26 PREVIOUS YEAR IN WHICH IT IS CREDITED BY THE PUBLIC FINANCIAL INSTITUTION OR THE SCHEDULED BANK OR THE STATE FINA NCIAL CORPORATION OR THE STATE INDUSTRIAL INVESTMENT CORP ORATION TO ITS PROFIT AND LOSS ACCOUNT FOR THAT YEAR OR, AS TH E CASE MAY BE, IN WHICH IT IS ACTUALLY RECEIVED BY THAT INSTITUTIO N OR BANK OR CORPORATION, WHICHEVER IS EARLIER. EXPLANATION.- FO R THE PURPOSES OF THIS SECTION,- (A) ' PUBLIC FINANCIAL INSTITUTION' SHALL HAVE THE MEA NING ASSIGNED TO IT IN SECTION 4A OF THE COMPANIES ACT, 1956 1 (1 OF 1956 ); (B) ' SCHEDULED BANK' SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE (II) OF THE EXPLANATION TO CLAUSE (VIIA) OF SUB- SECTION (1) OF SECTION 36; (C) ' STATE FINANCIAL CORPORATION' MEANS A FINANCIAL CORPORATION. ESTABLISHED UNDER SECTION 3 OR SECTION 3A OR AN INSTITUTION NOTIFIED UNDER SECTION 46 OF THE STATE FINANCIAL CORPORATIONS ACT, 19512 (63 OF 1951 ); (D) ' STATE INDUSTRIAL INVESTMENT CORPORATION' MEANS A GOVERNMENT COMPANY WITHIN THE MEANING OF SECTION 61 7 OF THE COMPANIES ACT, 1956 3 (1 OF 1956 ), ENGAGED IN THE BUSINESS OF PROVIDING LONG- TERM FINANCE FOR INDUSTRIAL PROJECT S AND APPROVED- BY THE CENTRAL GOVERNMENT UNDER CLAUSE (V III) OF SUB- SECTION (1) OF SECTION 36.] 14. THE APPELLANT WAS ACTING AS NBFC WITH A PROVISI ONAL REGISTRATION NO. 290.0158 W.E.F. 12.04.1993. THE APPELLANT WAS ALSO HAVING NET OWNED FUND EXCEEDING RS. 50 LACS HENCE ELIGIBLE TO ADOPT THE CASH SYSTEM OF ACCOUNTING FOR INCOME ON NPA AS PER THE C IRCULAR OF RBI. IT 27 IS ALSO IMPORTANT TO NOTE THAT THE APPELLANT WAS TR EATED AS A CATEGORY 1 MERCHANT BANKER BY SECURITIES & EXCHANGE BOARD OF I NDIA FOR THE PERIOD FROM 01.06.1996 TO 31.05.1999. 15. THE CASE LAWS RELIED UPON BY THE LD. AR THE PRU DENTIAL NORMS DO NOT OVERRIDE THE PROVISIONS OF THE ACT. HOWEVER, T HE APEX COURT MADE A DISTINCTION WITH REGARD TO INCOME RECOGNITION AND H ELD THAT THE INCOME HAD TO BE RECOGNIZED IN TERMS OF THE PRUDENTIAL NOR MS EVEN THOUGH THE SAME DEVIATED FROM THE MERCANTILE SYSTEM OF ACCOUNT ING AND/OR SECTION 145 OF THE INCOME TAX ACT. IT CAN BE SAID THEREFOR E, THAT THE APEX COURT APPROVED THE REAL INCOME THEORY WHICH IS IN GRAINED IN THE PRUDENTIAL NORMS FOR RECOGNITION OF THE REVENUE BY AN NBFC. A S PER THE REJECTION LETTER OF THE APPLICATION OF REGISTRATION AND DIREC TIONS OF THE RBI THE APPELLANT WILL BE TREATED AS NBFCS AND WILL GET THE BENEFITS. THE PRUDENTIAL NORMS FOR THE INCOME ON BAD DEBTS FOR IN COME RECOGNITION WILL BE ALLOWED ON MAINTAINING OF ACCOUNTS OF THE A SSESSEE. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE JURISDICTIONAL HIGH C OURT IN REGARD TO THE INCOME RECOGNITION AND PRUDENTIAL NORMS FOR NBFCS, WE ARE ALLOWING THE APPEAL OF THE ASSESSEE. THEREFORE, THIS GROUND IS ALLOWED. 16. IN REGARD TO THE GROUND NO. 2: THE CIT(A) HAS MENTIONED IN HIS ORDER AT PAGE 3 PARA 5 WHICH IS AS UNDER: SIMILARLY, THE ISSUE OF PUBLIC ISSUE EXPENDITURE AMOUNTING TO RS. 992229/- WAS DECIDED BY THE FIRST APPELLATE AUTHORITY AGAINST THE APPELLANT AND THE S AME HAD BECOME FINAL, AS NO SECOND APPEAL WAS FILED BY THE 28 APPELLANT AGAINST THE ORDER OF THE CIT(A). ACCORDI NGLY, THIS GROUND ALSO STANDS DISMISSED. 17. IN REGARD TO THIS WE UPHOLD THE ORDER OF THE CI T(A), THEREFORE, THIS GROUND IS DISMISSED. THEREFORE, THE APPEAL FILED B Y THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 19.05.2016 SD/- SD/- (I.C. SUDHIR) (L.P. SAHU) JUDICIAL MEMBER ACCOUNT ANT MEMBER DATED: 19.05.2016 *KAVITA ARORA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR DATE 1. DRAFT DICTATED ON 11.05.2016 PS 2. DRAFT PLACED BEFORE AUTHOR 13.05.2016 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 23.05.2016 PS/PS 6. KEPT FOR PRONOUNCEMENT ON 19.05.2016 PS 7. FILE SENT TO THE BENCH CLERK 23.05.2016 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.