ACIT, New Delhi V. M/s. GE Countrywide Consumer Financial Services Ltd., New Delhi

ITA 4069/DEL/2011

• Counselvise Citation: 406920114 RSA 2011
• Duration Of Justice: 1 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 29-10-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 07-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGH SENIOR
• Assessee Lawyers: MADHVI SWAROOP S
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C : NEW DELHI) SHRI I.C. SUDHIR, JUDICIAL MEMBER AND BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMEBR ITA NO.4069/DEL./2011 (ASSESSMENT YEAR : 2003-04) ACIT, CIRCLE 12 (1), VS. M/S. GE COUNTRYWIDE CONSU MER FINANCIAL SERVICES LTD., NEW DELHI. (NOW GE MONEY FINANCIAL SERVICES LTD. ,) 401, 402, 4 TH FLOOR AGGRAWAL MILLENNIUM TOWER, E 1, 2, 3, NETAJI SUBHASH PLACE, PITAMPURA, NEW DELHI 110 034. (PAN : AAACC0642F) ITA NO.4145/DEL./2011 (ASSESSMENT YEAR : 2004-05) ACIT, CIRCLE 12 (1), VS. M/S. GE COUNTRYWIDE CONSU MER FINANCIAL SERVICES LTD., NEW DELHI. (NOW GE MONEY FINANCIAL SERVICES LTD. ,) 401, 402, 4 TH FLOOR AGGRAWAL MILLENNIUM TOWER, E 1, 2, 3, NETAJI SUBHASH PLACE, PITAMPURA, NEW DELHI 110 034. (PAN : AAACC0642F) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI N. VENKAT RAMAN, SENIOR ADVOCAT E, SHRI TUSHAR JASWAL & MS. MADHVI SWAROOP, ADV OCATES REVENUE BY : SHRI SATPAL SINGH, SENIOR DR O R D E R PER B.C. MEENA, ACCOUNTANT MEMBER THESE TWO APPEALS FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE CIT (APPEALS)-IX, NEW DELHI DATED 29.06.2011 FOR ASSESS MENT YEARS 2003-04 AND ITA NO.4587/DEL/2012 2 2004-05. BOTH THE APPEALS ARE HEARD TOGETHER AND D ISPOSED OFF BY THIS COMMON ORDER AS THE ISSUE INVOLVED IN THE APPEALS IS COMMO N. 2. IN BOTH THESE APPEALS, THE ISSUE INVOLVED IS COM MON WHEREIN THE CIT (A) HAS DELETED THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF AMOUNT DEBITED ON REVERSAL OF INCOME BY CHANGING THE METHOD OF ACC OUNTING FROM ACCRUAL TO CASH BASIS AND ALSO THAT THE AMOUNT WAS NOT WRITTEN OFF IN THE BOOKS OF ACCOUNT AS IRRECOVERABLE. 3. THE ASSESSING OFFICER MADE THE ADDITION OF RS.2, 09,45,989/- TOWARDS THE INTEREST ON STICKY LOANS AND ADVANCES. THE CIT (A) DELETED THE ADDITION BY HOLDING AS UNDER :- 5.15 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPE LLANT AND THE FINDINGS OF THE AO AND THE FACTS ON RECORD. IT HAS BEEN SUBMITTED THAT BEING AN NBFC, THE APPELLANT FOLLOWS THE NBFC NORMS ISSUED BY RBI WHICH PROVIDES THAT INCOME RECOGNITION SHALL BE BAS ED ON RECOGNIZED ACCOUNTING STANDARD ACCOUNTING PRINCIPLES. FURTHER, THE ACCOUNTING PRACTICES FOLLOWED BY THE APPELLANT ARE ALSO IN ACC ORDANCE WITH NOTIFICATION NO.SQ 69(E) DATED 21.05.96 OF THE CBDT , WHEREBY CERTAIN ACCOUNTING STANDARDS HAD BEEN NOTIFIED. 5.16 I HAVE ALSO TAKEN INTO ACCOUNT THE DECISIONS S OUGHT TO BE RELIED UPON BY THE LD ARS IN SUPPORT OF THE APPELLANT'S CL AIM THAT EVEN UNDER MERCANTILE SYSTEM OF ACCOUNTING, AN INCOME CA N BE TAXED ONLY WHEN THERE IS A REASONABLE CERTAINTY OF ITS REALIZA TION AND THAT NO INCOME CAN BE RECOGNIZED FROM NON-PERFORMING ASSETS AND THE PRINCIPLE OF ACCRUAL CANNOT BE APPLIED TO NOTIONAL INCOME. CONSIDERING THE FACTS OF THE CASE IN TOTALITY AND KEEPING THE R ATIO OF THE CASES RELIED UPON BY THE APPELLANT AND THE DECISION OF MY LD. PR EDECESSOR, I HOLD ITA NO.4587/DEL/2012 3 THAT THE INTEREST ON STICKY LOAN AND ADVANCES CANNO T BE TAXED ON ACCRUAL BASIS. 4. AT THE TIME OF THE HEARING, THE LD. AR SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT IN THE CASE OF GE CAPITAL SERVICE INDIA VS. DCIT IN ITA NO.3198/DEL/2004 FOR ASSESSMENT YEAR 1999-00 DATED 07.09.2012. 5. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. THI S ISSUE IS SQUARELY COVERED BY THE DECISION OF ITAT IN THE CASE OF GE CAPITAL S ERVICE INDIA, CITED SUPRA, WHEREIN THE ITAT HAS DECIDED THE ISSUE AS UNDER :- 13. ADMITTEDLY THE ASSESSEE IS A NON-BANKING FINANCIAL COMPANY GOVERNED BY THE PROVISIONS OF THE RBI ACT AND THE NBFCS PRUDENTIAL NORMS (RESERVE BANK) DIRECTIO NS, 1998. SECTION 45Q OF THE RBI ACT READS AS UNDER: - 45Q CHAPTER III-B TO OVERRIDE OTHER LAWS THE PRO VISIONS OF THIS CHAPTER SHALL HAVE EFFECT NOTWITHSTANDING ANYT HING INCONSISTENT THEREWITH CONTAINED IN ANY OTHER LAW FOR THE TIME BEING IN FORCE OR ANY INSTRUMENT HAVING EF FECT 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 PR OVISIONS OF RBI ACT. THE RBI HAS ISSUED A NOTIFICATION, IN EXERCISE OF ITS POWERS U/S 45JA, ON NBFCS PRUDENTIAL NORMS (RBI), 1998. THE REVENUES CONTENT ION IS THAT ON ACCOUNT OF REVERSAL OF INTEREST INCOME, THE ASSESSEE HAS IN EF FECT RESORTED TO CASH SYSTEM OF ACCOUNTING, WHICH IS IN CONTRAVENTION TO THE PROVIS IONS OF SECTION 145, AS ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THIS PLEA CANNOT BE ACCEPTED BECAUSE OF THE SPECIFIC PROVISIONS CONTAINED IN THE RESERVE BANK OF INDIA ACT WHICH PRIMARILY ADMINISTER THE FUNCTIONING OF ASSES SEE. THERE IS NO DISPUTE THAT ASSESSEE HAD REVERSED THE INCOME IN RESPECT OF NPA AS PER THE PRUDENTIAL NORMS. THE ASSESSEE HAD TO C OMPLY WITH THE REQUIREMENTS OF RBI NORMS AND, THEREFORE, COULD NOT ACCOUNT FOR THE INCOME IN RESPECT OF ASSETS WHICH HAD BECOME NPA. THEREFORE, SECTION ITA NO.4587/DEL/2012 4 145 COULD NOT BE RESORTED TO FOR ACCO UNTING INCOME PURELY ON ACCRUAL BASIS. WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT IN CIT VS. VASISTH CHAY VYAPAR LTD., 330 ITR 440 (SUPRA), WHEREIN HONBLE DELHI HIGH COURT HAS OBS ERVED AS UNDER: - WE HAVE CONSIDERED THE RESPECTIVE SUBMISSIONS IN T HEIR PROPER PERSPECTIVE. BEFORE WE EMBARK ON THE DISCUSSION ON THESE ARGUMENTS, IT WOULD BE USEFUL TO EXTRACT THE RE LEVANT PROVISIONS OF THE RBI ACT AND THE NBFCS PRUDEN TIAL NORMS (RESERVE BANK) DIRECTIONS, 1998. SECTION 45Q O F THE RBI ACT, WHICH STARTS WITH NON OBSTANTE CLAUSE, READS AS UND ER : 45Q CHAPTER III-B TO OVERRIDE OTHER LAWS TH E PROVISIONS OF THIS CHAPTER SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING INCONSISTENT THEREWI TH 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 AP PLICATION OF THE AFORESAID PROVISIONS OF THE RBI AND THE DIRECTIONS, THE IC D 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, UNDER THE AFORESAID PROVISIONS, IT WAS MANDATORY ON THE PART OF THE ASSESSEE NOT TO RECOGNIZE THE INTEREST ON TH E ICD AS INCOME HAVING REGARD TO THE RECOGNIZED ACCOUNTING PRINCIPLES. THE ACCOUN TING PRINCIPLES WHICH THE ASSESSEE IS INDUBITABLY BOUND TO FOLLOW A RE AS-9. THE RELEVANT PORTION OF THE SAID ACCOUNTING STANDARD R EADS 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 UNREASONAB LE TO EXPECT ULTIMATE COLLECTION. 9.2 WHERE THE ABILITY TO ASSESS THE ULTIMATE COLL ECTION WITH REASONABLE CERTAINTY IS LACKING AT THE TI ME OF RAISING ANY CLAIM, E.G., FOR ESCALATION OF PRICE , EXPORT INCENTIVES, INTEREST ETC., REVENUE RECOGNITIO N IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVE D. IN SUCH CASES, IT MAY BE APPROPRIATE TO RECOGN IZE REVENUE ONLY WHEN IT IS REASONABLY CERTAI N THAT THE ULTIMATE COLLECTION WILL BE MADE. WHERE THER E IS NO UNCERTAINTY AS TO ULTIMATE COLLECTION, REVENUE IS R ECOGNIZED AT THE TIME OF SALE OR RENDERING OF S ERVICE EVEN THOUGH PAYMENTS ARE MADE BY INSTALMENT S. ITA NO.4587/DEL/2012 5 9.3 WHEN THE UNCERTAINTY RELATING TO COLL ECTABILITY ARISES SUBSEQUENT TO THE TIME OF SALE OR THE R ENDERING OF THE SERVICE, IT IS MORE APPROPRIATE TO MAKE A SEPARATE PROVISION TO REFLECT THE UNCERTAINTY RATHER T HAN TO ADJUST THE AMOUNT OF REVENUE ORIGINALLY RECORDED. 9.4 AN ESSENTIAL CRITERION FOR THE RECOGN ITION 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 REASONABLY DETERM INABLE. WHEN SUCH CONSIDERATION IS NOT DETERMI NABLE WITHIN REASONABLE LIMITS, THE RECOGNITION OF REVENU E IS POSTPONED. 9.5 WHEN RECOGNITION OF REVENUE IS POSTPO NED DUE TO THE EFFECT OF UNCERTAINTIES, IT IS CONSIDERED AS RE VENUE OF THE PERIOD IN WHICH IT IS PROPERLY RECOG NIZED. 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 THE 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 I N THE LIGHT OF THE PROVISIONS OF THE I.T. ACT AND TO EXAMI NE AS TO WHETHER IN THE GIVEN CIRCUMSTANC ES, INTEREST INCOME HAS ACCRUED TO THE ASSESSEE. IT I S STATED AT THE COST OF REPETITION THAT THE ADMITTED POSIT ION IS THAT THE ASSESSEE HAD NOT RECEIVED ANY INTEREST ON THE S AID ICD PLACED WITH SHAW WALLACE SINCE THE AY 1996-97 AS IT HAD BECOME NPAS IN ACCORDANCE WIT H THE PRUDENTIAL NORMS WHICH WAS ENTERED IN THE B OOKS OF ACCOUNT AS WELL. THE ASSESSEE HAS FURTHER SUCCESSFULLY DEMONSTRATED THAT EVEN I N THE SUCCEEDING ASSESSMENT YEARS, NO INTERES T WAS RECEIVED AND THE POSITION REMAINED THE SA ME UNTIL THE AY 2006-07. REASON WAS ADVERSE FI NANCIAL CIRCUMSTANCES AND THE FINANCIAL CRUNCH FACED BY SHA W WALLACE. SO MUCH SO, IT WAS FACING WINDIN G UP PETITIONS WHICH WERE FILED BY MANY CREDITORS. THESE CIRCUMSTANCES, LED TO AN UNCERTAINTY I N SO FAR AS RECOVERY OF INTEREST WAS CONCERNED, AS A RESULT OF THE AFORESAID PRECARIOUS FINANCIAL POSITION OF SHAW WALLACE. WHAT TO TALK OF INTERES T, EVEN THE PRINCIPAL AMOUNT ITSELF HAD BECOME DOUBTF UL TO RECOVER. IN THIS SCENARIO IT WAS LEGITIMATE MO VE TO ITA NO.4587/DEL/2012 6 INFER THAT INTEREST INCOME THEREUPON HAS NO T ACCRUED. WE ARE IN AGREEMENT WITH THE SUBMISSION OF MR . VOHAR ON THIS COUNT, SUPPORTED BY VAR IOUS DECISIONS OF DIFFERENT HIGH COURTS INCLUD ING THIS COURT WHICH HAS ALREADY BEEN REFERRED TO ABOVE. (2) IN THE INSTANT CASE, THE ASSESSE E-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 T HAT 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 H AVE 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 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 COURT, THE ASSESSEE A NBFC DEBITED RS.81,68,516/- AS PROVISION AGAI NST NPA IN THE PROFIT AND LOSS ACCOUNT, WHICH WAS CLAIMED AS DEDUCTION IN TERM S OF SEC. 36(1)(VII) OF THE ACT. THE ASSESSING OFFICER DID NOT ALLOW THE DEDUCTION CLAIMED AS AFORESAID ON THE GROUND THAT THE PROV ISION 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 INCOM E (BEING INCOME ACCRUED UNDER THE MERCANTILE SYSTEM OF ACCOUNTING). THE DISPUTE BEFORE THE APEX COURT CENTERED AROUND DEDUCTIBILITY OF PROVISION FOR NPA. AFTER ANALYZING THE PROVISIONS OF THE RBI ACT, THEIR LORDSHIPS OF THE APEX COURT OBSERVED THAT IN SO FAR AS THE PERMISSIB LE DEDUCTIONS OR EXCLUSIONS UNDER THE ACT ARE CONCERNED, THE SAME ARE ADMISSIBLE ONLY IF SUCH DEDUCTIONS/EXCLUSIONS SATISFY THE RELEVANT CON DITIONS 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 ITA NO.4587/DEL/2012 7 INCOME HAD TO BE RECOGNIZED IN TER MS 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 DECISIO N 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. RESPECTFULLY FOLLOWING THE DECISION OF THE AFORESAI D DECISION OF ITAT, DELHI BENCH C, NEW DELHI, WE DISMISS THE GROUND TAKEN B Y THE REVENUE. 6. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE A RE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 31 ST DAY OF OCTOBER, 2012. SD/- SD/- (I.C. SUDHIR) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 31 ST DAY OF OCTOBER, 2012 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XV, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR/ITAT NEW DELHI