ADITYA BIRLA FINANCE LTD, MUMBAI V. ASST CIT 2(1)(1), MUMBAI

ITA 3884/MUM/2017

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 6027 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 26-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATISH CHANDRA RAJORE
• Assessee Lawyers: RONAK G DOSHI
• Keywords: Bad and doubtful debts; Set aside
• Section: 115JB; 201; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A , MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO. 3 8 84 /MUM/2017 ASSESSMENT YEAR : 2012 - 13 ADITYA BIRLA FINANCE LIMITED, ONE INDIABULLS CENTRE, TOWER - I, 18 TH FLOOR, JUPITER MILL COMPOUND, 841, SENAPATI BAPAT MARG, ELPHINSTONE ROAD, MUMBAI [PAN : AA BCB 5769 M ] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX - 2(1)(1), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RO NAK G. DOSHI , A R RESPONDENT BY : SHRI SA TIS H CHANDRA RAJORE , D R DATE OF HEARING : 0 4 - 12 - 201 8 DATE OF PRONOUNCEMENT : - 31 - 12 - 201 8 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: TH IS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 3 , MUMBAI, DATED 10 - 0 3 - 201 7 . ASSESSEE HAS FILED CONCISE GROUNDS, WHICH ARE REPRODUCED HERE UNDER: ITA NO. 3 8 84 /MUM/2017 : 2 : CONCISE GROUNDS OF APPEAL: GROUND NO. 1: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN UPHOLDING THE ORDER OF THE AO THAT INTEREST ON NON - PERFORMING ASSETS (NPAS) OF RS. 1,55,35,707 IS TAXABLE ON ACCRUAL BASIS AND NOT RECEIPT/CASH BASIS UNDER THE NORMAL PROVISIONS OF THE ACT AS WELL AS UNDER MAT. GROUND NO. 2: WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT PRAYS THAT IF THE INTEREST ON NPAS IS TREATED AS TAXABLE IN THE CURRENT YEAR, THEN THE SAME SHOULD BE TREATED AS WRITE - OFF IN THE BOOKS OF ACCOUNTS OF THE CURRENT YEAR ITSELF AND BE ALLOWED AS A DEDUCTIBLE EXPENSE IN THE CURRENT YEAR ITSELF . GROUND NO. 3 IS GENERAL IN NATURE. 2. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 1 IS AGAINST THE CONFIRMATION OF ADDITION OF RS. 1,55,35,707/ - BY THE CIT(A) AS MADE BY THE ASSESSING OFFICER ( AO ) ON ACCOUNT OF INTEREST ON NON - PERFORMING ASSETS (NPAS) ON THE GROUND THAT THE INTEREST ON NPAS IS TAXABLE ON ACTUAL BASIS AND NOT ON RECEIPT BASIS. 3 . THE FACTS IN BRIEF ARE THAT IN THE ASSESSMENT ORDER, AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED FROM THE PERUSAL OF TAX AUDIT REPORT THAT A SUM OF RS. 1,55,36,707/ - HAS NOT BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNT ON ACCOUNT OF REMAINING OUTSTANDING FOR MORE THAN 180 DA YS THEREBY BECOMING NPA WHICH SHALL BE ACCOUNTED FOR ON CASH ITA NO. 3 8 84 /MUM/2017 : 3 : BASIS. ACCORDINGLY, ASSESSEE WAS ISSUED SHOW CAUSE NOTICE TO SHOW AS TO WHY THE INTEREST SHOULD NOT BE ADDED BACK TO THE INCOME OF ASSESSEE, FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, WHICH WAS REPLIED BY THE ASSESSEE VIDE LETTER DT. 20 - 10 - 2014, SUBMITTING THAT ASSESSEE HAD ACCRUED INTEREST ON NP A A M OUNTING TO RS. 1,55,36,707/ - , WHICH WAS NOT RECOGNIZED IN THE BOOKS OF ACCOUNT AS PER THE RBI PRUDENTIAL NORMS AND ACCOUNTING STANDARD ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA . THE SAID INTEREST WAS DUE FROM THREE PARTIES VIZ. I) SHRI KALPESHBHAI PADHYA, II) SANJAY PARMAR AND III) VYOMESH TRIVEDI. ASSESSEE SUBMITTED THAT IT DULY DISCLOSED THE SAID FACTS IN THE TAX AUDIT REPORT BY APPENDING A NOTE THAT THE ACCOUNT OF THE ASSESSEE HAS BEEN PREPARED ON MERCANTILE SYSTEM EXCEPT THE SAID FIGURE OF INTEREST ON NPAS OF RS. 1,55,36,707/ - . ASSESSEE FURTHER SUBMITTED THAT THE RBI ACT, 1934 EMPOWERS THE RBI TO ISSUE DIRECTIONS WITH REGARD TO TREATMENT TO BE GIVEN TO THE RECOVERY OF LOANS AND INTEREST THEREON. AS PER THE RBI GUIDEL INES, THE INTEREST ON NPAS WHICH REMAINED OVER DUE FOR A PERIOD OF SIX MONTHS OR MORE IS NOT TO BE RECOGNIZ ED AND IS TO BE RECOGNIZED ONLY WHEN THE SAME IS RECEIVED. IN VIEW OF THE SAID GUIDELINES ITA NO. 3 8 84 /MUM/2017 : 4 : /DIRECTIONS OF THE RBI, IT IS MANDATORY FOR THE NON - BANKIN G FINANCE COMPANIES (NBFC S ) TO FOLLOW THE PRUDENTIAL NORMS ISSUED BY THE RBI FOR DETERMINATION OF NPAS AND RECOGNITION OF INTEREST INCOME ON THE SAID NPAS AND THEREFORE, THE ASSESSEE IN COMPLIANCE WITH THE DIRECTIVES OF THE RBI, IS RECOGNIZING THE INTEREST ON NPAS ON RECEIPT BASIS IN THE BOOKS OF ACCOUNT WHICH IS A CONSISTENT PRACTICE FOLLOWED . THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA ( ICAI ) ALSO ISSUED ACCOUNTING STANDARD S ON RECOGNITION OF INCOME WHICH IS ACCOUNTING STANDARD - 9, PROVID ING THAT THE INCOME SHOULD BE RECOGNIZED ON ACCRUAL BASIS ONLY WHEN THERE IS CERTAINTY OF ITS ULTIMATE COLLECTION. HOWEVER, THE SUBMISSIONS OF ASSESSEE DID NOT FIND FAVOUR WITH THE AO AND HE ADDED THE SAID AMOUNT OF INTEREST ON NPAS TO THE INCOME OF THE ASSESSEE BY FRAMING ASSESSMENT U/S. 143(3), DT. 20 - 01 - 2015. 4 . IN THE APPELLATE PROCEEDINGS, CIT(A) DISMISSED THE A PPEAL OF ASSESSEE BY OBSERVING AND HOLDING AS UNDER: 6.2 I HAVE PERUSED THE ASSESSMENT ORDER AND APPELLANT'S SUBMISSIONS CAREFULLY. I FIND THAT THE APPELLANT'S ARGUMENTS FOR NOT RECOGNIZING INTEREST INCOME ON NPAS ARE ON SAME LINES AS GIVEN DURING ASSESSM ENT PROCEEDINGS, I.E. FOLLOWING THE PRUDENTIAL NORMS OF RBI, REQUIREMENT OF AS - 9 ETC. FURTHER, REGARDING TAXATION OF INTEREST INCOME ON NPA, THE APPELLANT HAS DISCUSSED THE CASE OF SOUTHERN ITA NO. 3 8 84 /MUM/2017 : 5 : TECHNOLOGIES LTD. (SUPRA) AS RELIED UPON BY THE AO, AND ALSO SOME OTHER CASE LAWS. THE PRINCIPLE DERIVED FROM THE SAID CASE LAWS IS EXPLAINED BY THE APPELLANT ITSELF IN FOLLOWING WORDS, IN PARA 27 OF HIS SUBMISSIONS: 'ACCRUAL (OR OTHERWISE) OF INCOME IS A MATTER OF FACT AND CIRCUMSTANCE OF CASE AND THE SYSTEM - OF ACCOUNTING - FOLLOWED DOES NOT GENERATE INCOME BUT ONLY RECOGNIZES IT. THE RBI DIRECTIONS 1998 HAVE NOTHING TO DO WITH THE COMPUTATION OF TAXABLE INCOME UNDER THE ACT. THE CHARACTERIZATION OF AN ASSET AS A NON - PERFORMING ASSET (NPA) DOES NOT AFFECT INCOME AC CRUAL FACTORS SUCH AS REALIS ABILIT Y AND SECURITY GIVEN AGAINST THE NPA ARE TO BE CONSIDERED BEFORE DECIDING ON THE ACCRUAL OF INCOME . 6.3 THE TAKE AWAY FROM SAID CASE LAWS, AS ADMITTED BY APPELLANT ITSELF, IS VERY CLEAR THAT THE RBI DIRECTIONS 1998 HAS NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THE APPELLANT HAS ADMITTED THAT THE FACTORS SUCH AS REALISABILY AND SECURITY GIVEN AGAINST NPA ARE TO BE CONSIDERED BEFORE DECIDING ON THE ACCRUAL OF INCOME. I FIND THAT THE AO, IN PARA 5.5 OF ASSESSMENT OR DER HAS ALSO DRAWN SIMILAR CONCLUSION THAT THE MATTER IS TO BE DECIDED ON THE BASIS OF FACTS AND CIRCUMSTANCES OF THE CASE. THEREFORE, WITHOUT ANY NEED TO DISCUSS THE PRUDENTIAL NORMS OF RBI IN REGARD TO NPAS, THE ISSUE CONFINES TO WHETHER ON FACTS & CIRCU MSTANCES OF THE CASE, THERE EXISTED REASONABLE CERTAINTY FOR COLLECTION OF INTEREST INCOME. 6.4 AS REGARDS THE ACCOUNTING STANDARD - 9 'REVENUE RECOGNITION', THE REVENUE SHOULD BE MEASURABLE AND AT THE TIME OF SALE OR RENDERING OF SERVICE IT WOULD NOT BE UNREASONABLE TO EXPECT ULTIMATE COLLECTION. IN PRESENT CASE, IT CANNOT BE DISPUTED THAT THE REVENUE IS MEASURABLE, SINCE THE FIGURE OF SUCH INTEREST ACCRUED BUT NOT RECEIVED IS ALREADY REFLECTED IN TAX AUDIT REPORT OF ASSESSEE. HENCE, HERE ALSO THE QUESTIO N REMAINS TO ASCERTAIN WHETHER THERE EXISTED REASONABLE CERTAINLY FOR COLLECTION OF INTEREST INCOME. 6.5 IN SUPPORT OF ITS ARGUMENT THAT THERE WAS NO REASONABLE CERTAINTY OF COLLECTION OF INTEREST INCOME, THE APPELLANT HAS MAINLY RELIED UPON THE PROVISION ING MADE FOR NPAS AS PER RBI PRUDENTIAL NORMS, WHICH BY ITSELF IS NOT SUFFICIENT TO PROVE THE SAME. THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. (SUPRA) HAS CLEARLY STATED THAT 'MERE CHARACTERIZATION OF AN ACCOUNT AS A NPA WOULD NOT BY ITSELF BE SUFFICIENT TO SAY THAT THERE IS UNCERTAINTY AS REGARDS REALIZABILITY OF INCOME OR INTEREST INCOME THEREON'. HENCE, THE ITA NO. 3 8 84 /MUM/2017 : 6 : APPELLANT'S SAID ARGUMENT CANNOT BE ACCEPTED. THE OTHER ARGUMENT GIVEN BY APPELLANT THAT THE PRINCIPAL AMOUNTS WERE WRITTEN OFF IN BOOKS IN FY 2013 - 14, CAN ALSO NOT BE ACCEPTED SINCE IT IS A FUTURE EVENT NOT KNOWN TO APPELLANT AS ON 31.03.2012, & EVEN TILL THE DATE OF FILING RETURN OF INCOME FOR AY 2012 - 13. THE APPELLANT ALSO SEEMS TO BE SILENT ON DETAILS OF SECURITY LYING AGAI NST SAID LOANS. HENCE, IT APPEARS THAT NO COGENT REASONS ARE GIVEN BY THE APPELLANT TO PROVE THAT THERE WAS NO REASONABLE CERTAINTY OF COLLECTION OF INTEREST ACCRUED. AT BEST, IT CAN BE SAID THAT THE SAID DEBTS WERE DOUBTFUL, IN WHICH CASE THERE IS A PRACT ICE TO MAKE PROVISION FOR DOUBTFUL DEBTS, HOWEVER NO DEDUCTION IS ALLOWABLE FOR SUCH PROVISION MADE UNDER THE INCOME TAX ACT. THE ONUS WAS ON THE APPELLANT TO PROVE THAT THERE WAS NO REASONABLE CERTAINTY OF RECEIPT OF INTEREST INCOME, IN WHICH THE APPELLAN T HAS FAILED. THE OTHER CASE LAWS RELIED UPON BY THE APPELLANT ARE DISTINGUISHABLE ON FACTS OF EACH CASE. IN VIEW OF ABOVE, I CONFIRM THE ACTION OF AO IN ASSESSING THE ACCRUED INTEREST OF RS. 1,55,36,7077 - IN HANDS OF APPELLANT. THEREFORE, GROUND NO. 1 AND 2 ARE DISMISSED . 5 . LD. AR VEHEMENTLY SUBMITTED BEFORE US THAT THE ISSUE INVOLVED IN THE PRESENT CASE OF RECOGNITION OF INTEREST ON NPAS ON RECEIPT BASIS HAS BEEN SETTLED BY A SERIES OF DECISIONS OF VARIOUS HON'BLE HIGH COURTS INCLUDING HON'BLE APEX COURT BY HOLDING THE INTEREST INCOME OF NBFC ON NPAS SHOULD BE TAXED ON ACTUAL BASIS AND NOT ON ACCRUAL BASIS . LD. AR RELIED ON THE FOLLOWING SERIES OF DECISIONS: I. CIT VS. VASISTH CHAY VYAPAR LTD., [330 ITR 440] (DEL HC); ITA NO. 3 8 84 /MUM/2017 : 7 : II. CIT VS. VASISTH CHAY VYAPAR LTD., [ 9 0 TAXMANN.COM 365] ( SC); III. CIT VS. KEC HOLDINGS LIMITED (ITA NO. 221 OF 2012) (BOM); IV. DIT VS. BRAHAMPUTRA CAPITAL FINANCIAL SERVICES LTD [335 ITR 182] (DEL HC); V. DCIT VS. LUDIANA CENTRAL LUDIANA CO - OP. BANK LTD., (77 TAXMANN.COM 371) (CHD.); VI. PCIT VS. LUDIANA CENTRAL CO - OP. BANK LTD., [99 TAXMANN.COM 81] (P&H); VII. PCIT VS. SHRI MAHILA SEWA SAHAKARI BANK LTD [ ITA NO. 531 OF 2015] (GUJ); VIII. PCIT VS. SARANGPUR CO - OPERATIVE BANK LTD [406 ITR 302] (GUJ); IX. INDIA DEBT MANAGEMENT (P) LTD., VS. DCIT [69 TAXMANN.COM 125] (MUM); X. ACIT VS. BOBCARDS LTD., [29 TAXMANN.COM 234] (MUM); XI. ACIT VS. SUNDERLAL SAWJI URBAN CO - OP BANK LTD [42 TAXMANN.COM 392] (PUN); ITA NO. 3 8 84 /MUM/2017 : 8 : 5.1 . ON THE ISSUE OF MAKING ADDITION TO BOOK PROFITS U/S. 115 JB OF THE ACT O N THE SAME AMOUNT, LD. AR SUBMITTED THAT ONCE THE AUDITOR OF THE COMPANY HA S CERTIFIED THE ACCOUNT TO BE MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT, THEN AO HAS NO JURISDICTION TO GO BEYOND THE NET PROFIT SHOWN IN THE PROFIT & LOSS A/C EXCEPT TO THE EXTENT AS PROVIDED IN THE EXPLANATION TO SECTION 115JB OF THE ACT . IN SUPPORT OF HIS CONTENTIONS, LD. AR ALSO RELIED ON THE FOLLOWING DECISIONS: I. APOLLO TYRES LTD., VS. CIT [255 ITR 273] (SC); II. CIT VS. ADBHUT TRADING CO (P) LTD., [ 338 ITR 94] (BOM) ; III. CIT VS. AKSHAY TEXTILES TRADING AND AGENCIES PVT. LTD., [304 ITR 401] (BOM); IV. KINETIC MOTOR CO. LTD., VS. DCIT [262 ITR 330] (BOM); 5.2. LD. AR PRAYED THAT IN VIEW OF THE SAID FACTS AND THE RATIO LAID DOWN AS STATED HEREIN ABOVE BY VARIO US JUDICIAL FORUMS ON THE ISSUE, THE ORDER OF CIT(A) SHOULD BE SET ASIDE AND AO IS DIRECTED ACCORDINGLY. ITA NO. 3 8 84 /MUM/2017 : 9 : 6 . LD. DR ON THE OTHER HAND RELIED ON THE ORDERS OF AO AND CIT(A) AND PRAYED FOR UPHOLDING THE SAME BY RELYING PRIMARILY ON MERCANTILE SYSTEM OF ACCOUNTING AND ARGUED THAT THE INCOME TAX ACT IS IN ITSELF A COMPLETE CO DE AND ANY DIRECTIONS FROM RBI NOT AFFECT THE CALCUL ATION OF INCOME OF THE ASSESSEE . 7 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD, INCLUDING THE IMPUGNED O RDER AND VARIOUS DECISIONS CITED BY THE LD. AR AS STATED HEREIN ABOVE AND OBSERVE THAT THE RATIO LAID DOWN IN THE DECISIONS AS IN FAVOUR OF ASSESSEE THAT INTEREST INCOME ON NPAS BY NBFC SHOULD BE RECOGNIZED ON THE BASIS OF CASH SYSTEM OF ACCOUNTING AND NOT MERCANTILE SYSTEM OF ACCOUNTING. THE DECISION OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. VA SISTH CHAY VYAPAR LTD., [330 ITR 440] (DELHI) , WHEREIN THE HON'BLE DELHI HIGH COURT HAS HELD THAT WHERE THE AMOUNT ADVANCED BY ASSESSEE HAS BECOME NPA DUE TO PRECARIOUS FINANCIAL POSITION OF THE LOANEE WHEN THE PRINCIPAL AMOUNT THUS HAS BECOME DOUBTFUL TO RECOVER, THE ASSESSEE WAS CORRECT TO INFER THAT INTERES T INCOME THEREON WOULD NOT ACCRUE. THE HON'BLE HIGH COURT HAS FURTHER HELD THAT SINCE AS PER THE PRUDENTIAL NORMS ISSUED BY THE RBI , THE SAID LOAN/D EPOSITS BECAME NPAS , ON ITA NO. 3 8 84 /MUM/2017 : 10 : WHICH NO INTEREST WAS RECEIVED AND POSSIBILITY OF RECOVERY WAS ALMOST NIL, THEN IT C OULD NOT BE TREATED AS ACCRUED INCOME OF ASSESSEE . T HE SAID DECISION OF THE DELHI HIGH COURT WAS ALSO AFFIRMED BY THE HON'BLE SUPREME COURT. IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT, UPHOLDING THE DECISION OF THE HON'BLE DELHI HIGH COU RT, WE ARE OF THE VIEW THAT THE ORDER OF CIT(A) CANNOT BE SUSTAINED AND WE ACCORDINGLY SET ASIDE THE SAME AND DIRECT THE AO TO DELETE THE ADDITION OF RS. 1,55,36,707 / - . 7 .1. SIMILARLY, WHILE COMPUTING BOOK PROFITS U/S. 115JB OF THE ACT , NO ADDITION IS REQUIRED TO BE MADE TO THE BOOK PROFITS. ONCE THE BOOK PROFITS ARE CERTIFIED BY THE AUDITORS OF THE COMPANY , TO BE PREPARED IN ACCORDANCE WITH COMPANIES ACT THEN EXCEPT TO THE EXTENT AS PROVIDED IN THE EXPLANATION TO SECTION 115JB OF THE ACT THE AO IS NOT EMPOWERED TO MAKE ANY ADJUSTMENT. T HE CASE OF ASSESSEE IS SUPPORTED BY THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD., VS. CIT [255 ITR 273] (SC) , WHEREIN THE HON'BLE APEX COURT HAS HELD THAT - O NCE THE BOOK PROFIT S OF THE ASSESSEE ARE CERTIFIED BY THE AUDITORS, AO HAS NO AUTHORITY TO INTERFERE I N THE SAME, EXCEPT TO THE EXTENT AS PROVIDED IN ITA NO. 3 8 84 /MUM/2017 : 11 : SECTION 115JB . THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE APEX COURT, WE DIRECT THE AO TO DELETE THE ADD ITION MADE U/S. 115JB OF THE ACT. 7 .2. SINCE WE HAVE DECIDED THE ISSUE ON THE MAIN GROUND, THE REMAINING GROUNDS RAISED BY THE ASSESSEE WILL BECOME INFRUCTUOUS, HENCE THE SAME ARE DISMISSED. 8 . IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST D AY OF DECEMBER, 2018 SD/ - SD/ - (MAHAVIR SINGH) (RAJESH KUMAR) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI; / DATED : 31 ST DECEMBER, 2018 TNMM / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) , MUMBAI 4. / CIT, MUMBAI 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE ITA NO. 3 8 84 /MUM/2017 : 12 : / BY ORDER, //TRUE COPY// / (DY./ASST. REGISTRAR) , / ITAT, MUMBAI