DCIT, CHENNAI V. Shriram Equipment Finance Co. Ltd., CHENNAI

ITA 873/CHNY/2016

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3871 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2016
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 14-09-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 05-04-2016
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: R SIVARAMAN
• Keywords: Diversion of income; Bad and doubtful debts
• Section: 143(3); 142(1); 115JB; 37(1); 37; 28

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL C BENCH, CHENNAI . , . , BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER & SHRI DUVVURU R L REDDY , JUDICIAL MEMBER ./ I T.A. NO. 873 /MDS/201 6 / ASSESSMENT YEAR :20 1 2 - 1 3 THE DEPUTY COMMISSIONER OF INCOME TAX, C ORPORATE CIRCLE 6 ( 1 ) , AAYAKAR BHAVAN, NEW BLOCK 121, M.G. ROAD, 7TH FLOOR, CHENNAI 600 034 . VS. M/S. SHRIRA M EQUIPMENT FINANCE CO. LTD., NO. 4, MOOKAMBIKA COMPLEX, LADY DESIKACHARY ROAD, MYLAPORE, CHENNAI 600 004. [PAN:AA NCS6957N ] ( / APPELLANT ) ( / RESPONDENT ) ./ I T.A. NO. 911/MDS/2016 / ASSESSMENT YEAR :2012 - 13 M/S. SHRIRAM EQUIPMENT FINANCE CO. LTD., NO. 4, MOOKAMBIKA COMPLEX, LADY DESIKACHARY ROAD, MYLAPORE, CHENNAI 600 004. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 6(1), CHENNAI 600 034. ( / APPELLANT ) ( / RESPONDEN T ) DEPARTMENT BY : SHRI PATHLAVATH PEERYA , CIT ASSESSEE BY : SHRI R. SIVARAMAN, ADVOCATE / DATE OF HEARING : 14 .0 9 .2016 / DATE OF P RONOUNCEMENT : 09 . 1 2 .2016 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : TH E CROSS APPEAL S FILED BY THE REVENUE AS WELL AS ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX I.T.A. NO S . 873 & 911 /M/ 16 2 ( APPEALS ) 1 5 , CHENNAI , DATED 0 8 . 0 1 .201 6 RELEVANT TO THE ASSESSMENT YEAR 20 1 2 - 1 3 . THE ONLY EFFECTIVE GROUND RAISED IN THE APPEAL OF THE REVENUE IS THAT THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF .3,52,11,128/ - IN RESPECT OF NON - PERFORMING ASSETS OR PROVISION FOR BAD DEBTS. IN THE ASSESSEE S APPEAL, THE ASSESSEE HAS RAISED TWO EFFECTIVE GROUNDS VIZ., (I) CONFIRMATION OF DISALLOWANCE OF .15,40,36,320/ - TRANSFERRED TO RESERVE FUND UNDER SECTION 45I C OF THE RBI ACT AND (II) CONFIRMATION OF ADDITION OF .10,32,50,000/ - MADE WHILE COMPUTING TH E BOOK PROFIT UNDER SECTION 115J B OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT]. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY HAS FILED ITS RETURN O F INCOME ON 28.09.2012 DECLARING A TOTAL INCOME OF .65,34,37,650/ - . THE RETURN FILED BY THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED ON 07.08.2013 AND DULY SERVED ON THE ASSESSEE. THEREAFTER, NOTICE UNDER SE CTION 142(1) OF THE ACT DATED 30.10.2014 WAS ISSUED TO THE ASSESSEE. IN RESPONSE THERETO, THE ASSESSEE HAS FILED ALL THE DETAILS AND AFTER EXAMINING THE DETAILS FILED BY THE ASSESSEE, THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT ON 06.02.20 15 BY ASSESSING THE TOTAL INCOME OF THE ASSESSEE AT .84,26,85,098/ - AFTER MAKING VARIOUS ADDITIONS. I.T.A. NO S . 873 & 911 /M/ 16 3 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND BY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE S GROUP CASES, THE LD. CIT(A) PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE. 4. ON BEING AGGRIEVED, BOTH THE ASSESSEE AS WELL AS REVENUE ARE IN APPEALS BEFORE THE TRIBUNAL. IN THE REVENUE S APPEAL, THE LD. DR HAS CONTENDED THAT EVEN THOUGH AS PER THE STATUTORY BOOKS, THE BAD DEBT S WRITTEN OFF WERE ONLY .69.83 LAKHS, WHEREAS, THE ASSESSEE HAS CLAIMED BAD DEBTS OF .421.94 LAKHS IN THE INCOME TAX ACCOUNT INCLUDING .352.11 LAKHS, WHICH WAS SHOWN AS PROVISION FOR BAD DEBT, BUT ACTUALLY NOT WRITTEN OFF IN THE BOOKS OF ACCOUNTS. THEREFORE, THE LD. CIT(A) WEN T IN WRONG TO DELETE THE ADDITION OF .3,52,11,128/ - AND THE LD. DR HAS PLEADED THAT THE ORDER OF THE LD. CIT(A) SHOULD BE REVERSED. HE STRONGLY RELIED ON THE DECISION IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. V. JCIT 320 ITR 577 (SC). ON THE OTHER HAND, T HE LD. COUNSEL FOR THE ASSESSEE STRONGLY SUPPORTED BY THE ORDER PASSED BY THE LD. CIT(A), SINCE THE LD. CIT(A) HAS PASSED THE ORDER BY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL. 5. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE POINT AT ISSUE IS WHETHER THE ASSESSEE IS ELIGIBLE TO CLAIM THE PROVISION MADE FOR NON - PERFORMING ASSETS AS BAD DEBT UNDER SECTION 36(1)(VII) OR 37(1) OF THE ACT , WHEN THE BAD DEBT I.T.A. NO S . 873 & 911 /M/ 16 4 WAS ACTUALLY NOT WRITTEN OFF IN THE BOOKS . AS PER THE ACCOUNTS PREPARED AS PER COMPANY LAW AS ON 31.03.2012, THE PROVISIONS AN WRITE OFF IN THE SCHEDULE 19 ARE AS UNDER: PROVISION FOR NON - PERFORMING ASSETS . 352.11 LAKHS BAD DEBTS WRITE OFF . 69.83 LAKHS TOTAL . 421.94 LAKHS HOWEVER, AS PER THE ACCOUNTS PREPARED FOR THE PURPOSE OF INCOME TAX, THE ASSESSEE CLAIMED .421.94 LAKHS AS BAD DEBTS WRITTEN OFF, BUT NO ADJUSTMENTS HAVE BEEN MADE IN THE COMPUTATION. THOUGH AS PER THE STATUTORY BOOKS THE BAD DEBTS WRITTE N OFF WERE ONLY .69.83 LAKHS, THE ASSESSEE HAS CLAIMED .421.94 LAKHS IN THE INCOME TAX ACCOUNTS. THE AMOUNT OF .352.11 LAKHS WHICH WAS SHOWN AS PROVISION IN THE STATUTORY BOOKS WAS TAKEN AS WRITTEN OFF FOR THE PURPOSE OF INCOME TAX. THERE CANNOT BE PROV ISION FOR THE PURPOSE OF STATUTORY BOOKS AND ACTUAL WRITE OFF FOR INCOME TAX PURPOSE. IF THE AMOUNT IS WRITTEN OFF, IT SHOULD BE SAME IN BOTH THE ACCOUNTS. THEREFORE, THE ASSESSING OFFICER HAS CONCLUDED THAT SINCE THERE WAS NO ACTUAL WRITE OFF TOOK PLACE I N THE ACCOUNTS TO THE EXTENT OF .352.11 LAKHS AND BAD DEBT WRITTEN OFF CLAIMED WAS MERELY IN THE NATURE OF PROVISION ONLY HAS BEEN DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. WHILE ALLOWING THE GROUND RAISED BY THE ASSESSEE , BY FOLLOWING THE COORDINATE BENCH OF THE TR IBUNAL, THE LD. CIT(A) HAS OBSERVED AND HELD AS UNDER: I.T.A. NO S . 873 & 911 /M/ 16 5 5.2.2 I HAVE CONSIDERED THE FINDINGS GIVEN BY THE AO AND ALSO SUBMISSIONS MADE BY THE AR OF THE APPELLANT. THE HON BLE ITAT B BENCH, CHENNAI IN CONSOLIDATED ORDER IN THE CASE OF M/S. SHRIRAM CITY UN ION FINANCE LTD. VIDE ITA NO. 726/MDS/2010 FOR A.Y. 2006 - 07 AND M/S. SHRIRAM TRANSPORT FINANCE COMPANY LTD VIDE ITA NO. 725/MDS/2010 FOR A.Y. 2006 - 07 DATED 16.12.2010 HAS DISMISSED THE REVENUE S APPEAL ON THE ISSUE OF BAD DEBTS. RESPECTIVELY FOLLOWING THE DECISION OF HON BLE ITAT IN THE AFORESAID ORDERS, THE AO IS DIRECTED TO ALLOW .3,52,11,128/ - AS NON - PERFORMING ASSETS OR PROVISION FOR BAD DEBTS. THIS GROUND OF APPEAL IS ALLOWED. 5.1 IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. V. JCIT 296 ITR 514, THE H ON BLE JURISDICTIONAL HIGH COURT HAD AN OCCASION TO CONSIDER SIMILAR ISSUE, WHERE, THE ASSESSEE HAS MADE PROVISION BUT ACTUALLY NOT WRITTEN OFF IN THE BOOKS BUT CLAIMED DEDUCTION UNDER SECTION 36(2) AND 36(1)(VII) OF THE ACT. AFTER CONSIDERING THE SUBMISSI ONS OF THE LD. COUNSEL THAT THE BAD DEBTS CLAIMED ARE PROVISION FOR NON - PERFORMING ASSETS, BY DISMISSING THE APPEAL OF THE ASSESSEE, THE HON BLE HIGH COURT HAS OBSERVED AND HELD AS UNDER: THE APPEAL IS AGAINST THE ORDER PASSED BY THE INCOME - TAX APPELLATE TRIBUNAL, WHEREBY THE CLAIM OF DEDUCTION OF RS. 81,68,516 AND RS. 15,27,676 WERE DISALLOWED AS THE DEDUCTIONS UNDER SECTION 36(2) AND 36(1)(VII) OF THE INCOME - TAX ACT, 1961. OBVIOUSLY, THESE AMOUNTS WERE THE PROVISIONS MADE AND WERE EARLIER ALLOWABLE UNDER SECTION 36(1)(VII). HOWEVER, THEREAFTER AN AMENDMENT CAME TO BE MADE BY ADDING EXPLANATION TO SECTION 36, BECAUSE OF WHICH AN); PROVISIONS MADE FOR BAD AND DOUBTFUL DEBTS WERE NOT TO BE TREATED AS ALLOWABLE DEDUCTIONS. MR. JANARDHANA RAJA, LEARNED COUNS EL ARGUING ON BEHALF OF THE ASSESSEE VERY FAIRLY CONTENDS THAT HE MAY NOT HAVE ANY CASE ON ACCOUNT OF THE EXPLANATION ADDED TO SECTION 36(1) (VII) AND THAT THE PROVISIONS MADE FOR THE PAYMENT OF BAD AND DOUBTFUL DEBTS MAY NOT BE ALLOWED IN HIS FAVOUR ON TH AT COUNT. WE ALSO FIND THAT THE AUTHORITIES BELOW HAVE CORRECTLY READ THE PROVISIONS OF SECTION 36(2) AND 36(1)(VII) AND HAVE REFUSED TO GIVE RELIEF TO THE ASSESSEE ON THAT COUNT. I.T.A. NO S . 873 & 911 /M/ 16 6 LEARNED COUNSEL HOWEVER RAISES AN INTERESTING POINT AND SAYS THAT THESE BE ING THE NON - PERFORMING ASSETS, WOULD CLEARLY AMOUNT TO THE TRADING LOSSES AND AS SUCH, THESE AMOUNTS SHOULD HAVE BEEN CONSIDERED AS THE TRADING LOSSES AND SHOULD HAVE BEEN GIVEN CREDIT UNDER SECTION 28 READ WITH SECTION 29. THE CONTENTION IS CLEARLY INCORR ECT. WHEN WE SEE THE FACTS, WE DO NOT FIND ANY AMOUNTS OR PART THEREOF HAVING BEEN WRITTEN OFF AS BAD DEBTS WHICH WAS AN ALLOWABLE DEDUCTION. IF A SPECIFIC PROVISION IS ADDED BY WAY OF AN AMENDMENT TO SECTION 36(1)(VII), THEN NO INTERPRETATION BYPASSING SE CTION 36(1)(VII) COULD BE MADE OF EITHER SECTION 28 OR SECTION 29 SO AS TO SET AT NAUGHT THE AMENDMENT. THAT WOULD BE SIMPLY AGAINST THE ESTABLISHED CANONS OF THE INTERPRETATION OF STATUTE. THIS IS BESIDES THE POINT THAT THE ACTUAL ACCOUNTS DO NOT REFLECT THESE AMOUNTS AS TRADING LOSSES. ON THAT COUNT, THE APPEAL IS CLEARLY WITHOUT ANY MERIT AND IS DISMISSED. 5.2 AGAINST THE ABOVE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE HON BLE SUPREME COURT . A FTER CONSIDERING THE RELEVANT PROVISIONS, RBI NORMS, DISCUSSING THE THEORY OF REAL INCOME , ETC. THE HON BLE SUPREME COURT HAS OBSERVED AND HELD AS UNDER: WHILE COMPUTING THE PROFITS AND GAINS UNDER SECTIONS 28 TO 43D OF THE INCOME - TAX ACT, 1961 OF A N ON - BANKING FINANCIAL COMPANY, THE DEPARTMENT IS ENTITLED TO TREAT THE 'PROVISION FOR NON - PERFORMING ASSETS' WHICH ILL TERMS OF THE NON - BANKING FINANCIAL COMPANIES PRUDENTIAL NORMS (RESERVE BANK) DIRECTIONS, 1998, IS DEBITED TO THE PROFIT AND LOSS ACCOUNT, AS 'INCOME' UNDER SECTION 2(24) OF THE ACT. THE NON - BANKING FINANCIAL COMPANIES PRUDENTIAL NORMS (RESERVE BANK) DIRECTIONS, 1998, ARE ONLY DISCLOSURE NORMS: THEY HAVE NOTHING TO DO WITH THE COMPUTATION OF TOTAL TAXABLE INCOME UNDER THE INCOME - TAX ACT, 19 61, OR WITH ACCOUNTING TREATMENT. THE DIRECTIONS ONLY LAY DOWN THE MANNER OF PRESENTATION OF NPA (NON - PERFORMING ASSETS) IN THE BALANCE SHEET OF A NON - BANKING FINANCIAL COMPANY. THE OBJECT OF THE DIRECTIONS THAT NON - BANKING FINANCIAL COMPANIES HAVE TO ACCE PT THE CONCEPT OF 'INCOME' EVOLVED BY THE RESERVE BANK OF INDIA AFTER DEDUCTING PROVISION AGAINST NON - PERFORMING ASSETS IS ONLY DISCLOSURE AND PROVISIONING AND SUCH TREATMENT IS CONFINED TO PRESENTATION/DISCLOSURE AND HAS NOTHING TO DO WITH COMPUTATION OF I.T.A. NO S . 873 & 911 /M/ 16 7 TAXABLE INCOME UNDER THE INCOME - TAX ACT. PROVISION FOR NON - PERFORMING ASSETS IN TERMS OF THE DIRECTIONS OF THE RESERVE BANK OF INDIA DOES NOT CONSTITUTE 'EXPENSE' ON THE BASIS OF WHICH DEDUCTION CAN BE CLAIMED BY THE NON - BANKING FINANCIAL COMPANIES UNDER S ECTION 36(1)(VII) OF THE ACT. THE BASIS OF EVERY BUSINESS IS THAT ANTICIPATED LOSSES MUST BE TAKEN INTO ACCOUNT BUT EXPECTED INCOME NEED NOT BE TAKEN NOTE OF THIS IS THE BASIS OF THE NON - BANKING FINANCIAL COMPANIES PRUDENTIAL NORMS (RESERVE BANK) DIRECTI ONS, 1998, AS IT IS CLOSER TO THE REALITY OF CASH LIQUIDITY THAT PREVENTS NON - BANKING FINANCIAL COMPANIES FROM COLLAPSE. IN 1989 BY THE INSERTION OF A NEW EXPLANATION IN SECTION 36(1)(VII) OF THE INCOME - TAX ACT, 1961, A DICHOTOMY WAS BROUGHT IN AND IT HAS BEEN CLARIFIED THAT ANY BAD DEBT WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE WILL NOT INCLUDE ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN THE ACCOUNTS OF THE ASSESSEE. IF AN ASSESSEE DEBITS AN AMOUNT OF DOUBTFUL DEBT TO THE PROFIT AN D LOSS ACCOUNT AND CREDITS THE ASSET ACCOUNT LIKE THE SUNDRY DEBTORS ACCOUNT, IT WOULD CONSTITUTE A WRITE - OFF OF AN ACTUAL DEBT. HOWEVER, IF AN ASSESSEE DEBITS 'PROVISION FOR DOUBTFUL DEBTS' TO THE PROFIT AND LOSS ACCOUNT AND MAKES A CORRESPONDING CREDIT T O THE 'CURRENT LIABILITIES AND PROVISIONS' ON THE LIABILITIES SIDE OF THE BALANCE SHEET, THEN IT WOULD CONSTITUTE A PROVISION FOR DOUBTFUL DEBT. IN THE LATTER CASE THE ASSESSEE WOULD NOT BE ENTITLED TO DEDUCTION AFTER APRIL 1, 1989. THE INCOME - TAX IS A T AX ON 'REAL INCOME', I.E., THE PROFITS ARRIVED AT ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE ACT. THEREFORE, IF BY THE EXPLANATION TO SECTION 36(1)(VII) A PROVISION FOR DOUBTFUL DEBT IS KEPT OUT OF THE AMBIT OF BAD DEBT WHICH IS WRITTEN OFF, THEN ONE HAS TO TAKE INTO ACCOUNT THE EXPLANATION IN COMPUTING THE TOTAL INCOME UNDER THE INCOME - TAX ACT FAILING WHICH ONE CANNOT ASCERTAIN THE REAL PROFITS. THE PROVISION FOR NON - PERFORMING ASSETS DEBITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE RESERVE BANK DIRECTIONS OF 1998 IS ONLY A NOTIONAL EXPENSE AND, THEREFORE, THERE WOULD BE ADD BACK TO THAT EXTENT ILL THE COMPUTATION OF TOTAL INCOME UNDER THE INCOME - TAX ACT. SECTION 37 APPLIES ONLY TO ITEMS WHICH DO NOT FALL IN SECTIONS 30 TO 36. IF A PROVISIO N FOR DOUBTFUL DEBTS IS EXPRESSLY EXCLUDED FROM SECTION 36(1)(VII) THEN SUCH A PROVISION CANNOT COME UNDER SECTION 37 EVEN ON THE BASIS OF THE 'REAL INCOME THEORY'. I.T.A. NO S . 873 & 911 /M/ 16 8 IT IS TRUE THAT UNDER PART I OF SCHEDULE VI TO THE COMPANIES ACT, 1956, AN AMOUNT COULD B E FIRST INCLUDED IN THE LIST OF SUNDRY DEBTORS/LOANS AND THEN DEDUCTED FROM THE LIST AS 'PROVISION FOR DOUBTFUL DEBTS'. HOWEVER, THESE ARE MATTERS OF PRESENTATION OF PROVISIONS FOR DOUBTFUL DEBTS EVEN UNDER THE COMPANIES ACT AND HAVE NOTHING TO DO WITH TAX ABILITY UNDER THE INCOME - TAX ACT. BROADLY, THERE ARE THREE DEVIATIONS BETWEEN THE DIRECTIONS OF THE RESERVE BANK OF INDIA OF 1998 AND THE COMPANIES ACT: TI) IN THE MATTER OF PRESENTATION OF FINANCIAL STATEMENTS UNDER SCHEDULE VI TO THE COMPANIES ACT; (II ) IN NOT RECOGNIZING THE 'INCOME' UNDER THE MERCANTILE SYSTEM OF ACCOUNTING AND INSISTING ON FOLLOWING THE CASH SYSTEM WITH RESPECT TO ASSETS CLASSIFIED AS NON - PERFORMING ASSETS AS PER ITS NORMS; AND (III) IN CREATING A PROVISION FOR ALL NON - PERFORMING ASS ETS SUMMARILY AS AGAINST CREATING A PROVISION ONLY WHEN THE DEBT IS DOUBTFUL OF RECOVERY UNDER THE NORMS OF ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE COMPANIES ACT ALLOWS A NON - BANKING FINANCIAL COMPANY TO ADJUST A PROVISION FOR POSSIBLE DIMINUTION IN THE VALUE OF AN ASSET OR PROVISION FOR DOUBTFUL DEBTS AGAINST THE ASSETS AND ONLY THE NET FIGURE IS ALLOWED TO BE SHOWN IN THE BALANCE SHEET AS A MATTER OF DISCLOSURE. HOWEVER, THE DIRECTIONS OF 1998 MANDATE ALL NON - BANKING FINANCIAL COMPANIES TO SHOW THE SAID PROVISIONS SEPARATELY ON THE LIABILITIES SIDE OF THE BALANCE SHEET UNDER THE HEAD 'CURRENT LIABILITIES AND PROVISIONS'. THE PURPOSE OF THIS DEVIATION IS TO INFORM THE USER OF THE BALANCE SHEET OF PARTICULARS CON CERNING THE QUANTUM AND QUALITY OF THE DIMINUTION IN THE VALUE OF INVESTMENT AND PARTICULARS OF DOUBTFUL AND SUB - STANDARD ASSETS. SIMILARLY THE 1998 DIRECTIONS DO NOT RECOGNIZE 'INCOME' UNDER THE MERCANTILE SYSTEM AND INSIST THAT NON - BANKING FINANCIAL COMP ANIES SHOULD FOLLOW THE CASH SYSTEM IN REGARD TO SUCH INCOMES. THE NATURE OF EXPENDITURE UNDER THE INCOME - TAX ACT CANNOT BE CONCLUSIVELY DETERMINED BY THE MANNER IN WHICH ACCOUNTS ARE PRESENTED IN TERMS OF THE 1998 DIRECTIONS. THOUGH THEY DEVIATE FROM AC COUNTING PRACTICE AS PROVIDED IN THE COMPANIES ACT, THEY DO NOT OVERRIDE THE PROVISIONS OF THE INCOME - TAX ACT. PROVISION FOR NON - PERFORMING ASSETS IN TERMS OF THE DIRECTIONS OF 1998 DOES NOT CONSTITUTE EXPENSE ON THE BASIS OF WHICH DEDUCTION CAN BE CLAIM ED UNDER SECTION 36(1)(VII) OF THE INCOME - TAX ACT. I.T.A. NO S . 873 & 911 /M/ 16 9 IT IS VERY CLEAR THAT THE RESERVE BANK OF INDIA DIRECTIONS OF1998 ARE MERELY PRUDENTIAL NORMS REGARDING PRESENTATION OF THE NON - PERFORMING ASSETS PROVISION ILL THE BALANCE SHEET: THEY DO NOT TOUCH UPON T HE NATURE OF THE EXPENSE TO BE DECIDED BY THE ASSESSING OFFICER IN THE ASSESSMENT PROCEEDINGS UNDER THE INCOME - TAX ACT. RISK IS ONE OF THE MAIN CONCERNS WHICH THE RESERVE BANK OF INDIA HAS TO ADDRESS WHEN IT COMES TO NON - BANKING FINANCIAL COMPANIES. NON - BANKING FINANCIAL COMPANIES ACCEPT DEPOSITS FROM THE PUBLIC FOR WHICH TRANSPARENCY IS THE KEY. HENCE, WE HAVE THE RESERVE BANK OF INDIA DIRECTIONS/NORMS. ON THE OTHER HAND AS FAR AS BANKING GOES, THE WEIGHTAGE ONE MUST PLACE ON IS 'LIQUIDITY'. THESE TWO CO NCEPTS, VIZ., 'RISK' AND 'LIQUIDITY' BRING THE BASIC DIFFERENCE BETWEEN NON - BANKING FINANCIAL COMPANIES AND BANKS. IN A CHALLENGE TO THE VALIDITY OF A TAXING ENACTMENT THE COURT SHOULD GIVE SOME LATITUDE TO THE LAW - MAKERS IN ENACTING LAWS WHICH IMPOSE RE ASONABLE RESTRICTIONS UNDER ARTICLE 19(6) OF THE CONSTITUTION OF INDIA. THE RESTRICTIONS IF ANY PLACED ON NON - BANKING FINANCIAL COMPANIES UNDER SECTION 36(1)(VIIA) OR UNDER SECTION 430 SATISFY THE PRINCIPLE OF' REASONABLE JUSTIFICATION '. DECISION OF THE MADRAS HIGH COURT IN SOUTHERN TECHNOLOGIES LTD. V. JOINT CIT [2008] 296 ITR 514 AFFIRMED. 5.2 FROM THE ABOVE DECISION OF THE HON BLE SUPREME COURT, IT IS VERY CLEAR THAT MERE MAKING PROVISION OF NON - PERFORMING ASSETS, THE ASSESSEE IS NOT ELIGIBLE TO CLA IM DEDUCTION THE SAME AS BAD DEBT UNTIL AND UNLESS THE ASSESSEE HAS ACTUALLY WRITTEN OFF THE SAME AS BAD DEBT. 5.3 WHILE DECIDING THE SIMILAR ISSUE IN THE CASE OF DCIT V. M/S. SHRIRAM TRANSPORT FINANCE CO. LTD. IN I.T.A. NO. 728/MDS/2016 VIDE CONSOLIDATE D ORDER OF THE TRIBUNAL DATED 24.08.2016, THE ABOVE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. V. JCIT (SUPRA) I.T.A. NO S . 873 & 911 /M/ 16 10 WAS NOT PLACED BEFORE THE COORDINATE BENCH OF THE TRIBUNAL. THUS, R ESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE HON BLE SUPREME COURT, WE REVERSE THE FINDINGS OF THE LD. CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER . ACCORDINGLY, THE APPEAL FILED BY THE REVENUE IS ALLOWED. 6. IN THE APPEAL OF THE ASSESSEE, THE FIRST GROUND RAISED BY THE ASSESSEE IS THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF THE AMOUNT OF .15,40,36,320/ - TRANSFERRED TO R ESERVE F UND UNDER SECTION 45IC OF THE RBI ACT BY HOLDING THAT IT IS AN APPLICATION OF INCOME AND THE SECOND GROUND IS THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF .10,32,50,000/ - BEING THE AMOUNT TRANSFERRE D TO STATUTORY RESERVE FUND. 6.1 I N THE ASSESSMENT ORDER , T HE A SSESSING O FFICER HAS HELD THAT THE A MOUNT OF .15,40,36,320/ - WAS DEDUCTED IN THE STATEMENT OF COMPUTATION OF TOTAL INCOME AND HAS DEDUCTED .10,32,50,000/ - BEING THE AMOUNT TRANSFERRED TO T HE STATUTORY RESERVE FROM THE PROFITS IN THE P&L ACCOUNTS AS PER THE COMPANIES ACT IN THE COMPUTATION OF BOOK PROFIT U NDER SECTION 115JB OF THE ACT . TRANSFER TO STATUTORY RESERVE IS NOT AN EXPENDITURE INCURRED BY THE ASSESSEE FOR ITS BUSINESS. HENCE IT CAN NOT BE ALLOWED AS DEDUCTION U NDER SECTION 37 OF THE ACT. MOREOVER , THE AMOUNT REMAINED ON THE LIABILITY SIDE OF THE BALANCE SHEET AND THIS AMOUNT IS BEING UTILIZED BY THE ASSESSEE FOR ALL ITS BUSINESS PURPOSE. THERE IS NO OUTGO OF ANY CASH OR ASSETS ON ACC OUNT OF THIS TRANSFER. THE PROVISIONS OF RBI TO CREATE A RESERVE ARE ON L Y A I.T.A. NO S . 873 & 911 /M/ 16 11 PRUDENTIAL EFFORT TO SAFEGUARD THE INTEREST OF THE SHAREHOLDERS OR A NB F C COMPANY. IT CANNOT BE INTERPRETED AS THE ASSESSEE TO CREATE A NOTIONAL INCOME AND HENCE THE SAME CANNOT BE CLAIMED AS A DEDUCTION FROM THE TOTAL INCOME COMPUTED FOR INCOME TAX PURPOSE. THE ASSESSEE COMPANY HAS CREATED STATUTORY RESERVE FOR 20% OF THE PROFITS. H OWEVER, RESERVES ARE TO BE CREATED ONLY OUT OF PROFIT AFTER TAX BY WAY OF APPROPRIATION. HENCE THE CR EATION OF STATUTORY RESERVE IS NOTHING BUT AN APPLICATION OF INCOME AFTER THE PROFIT HAS BEEN EARNED BY THE ASSESSEE COMPANY AND SUCH PROFIT NEEDS TO BE TAXED. FURTHER, THE ASSESSING OFFICER HAS OBSERVED THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER FOR EARLIER YEARS HAS BEEN CONTESTED BY THE ASSESSEE AND ALL SUCH DISALLOWANCE HAS BEEN CONFIRMED BY THE TRIBUNAL. THUS, BY FOLLOWING THE ORDER OF THE TRIBUNAL IN EARLIER YEARS, THE ASSESSING OFFICER HAS HELD THAT THE AMOUNT TRANSFERRED TO THE STATUTORY RE SERVE IS NOT AN ALLOWABLE DEDUCTION AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE, BOTH IN THE NORMAL COMPUTATION FOR TAXATION AND ALSO TO THE COMPUTATION OF BOOK PROFIT FOR TAXATION AS PER THE PROVISIONS OF SECTION 115JB OF THE ACT. 6.1 THE ASS ESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) AND BY FILING A WRITTEN SUBMISSION, THE AR OF THE ASSESSEE HAS SUBMITTED BEFORE THE LD. CIT(A) AS UNDER: AS PER SECTION 451C OF RBI ACT, 20% OF THE NET PROFIT OF THE COMPANY CANNOT FORM PART OF THE REAL INCOME OF THE APPELLANT. THE APPELLANT HAS I.T.A. NO S . 873 & 911 /M/ 16 12 LOST CONTROL OVER THAT PART OF THE INCOME AND PROVISIONS OF SECTION 45Q OF THE RBI ACT OVERRIDES THE PROVISIONS OF THE INCOME TAX ACT. THE APPELLANT LOSES THE TITLE OVER 20% OF THE INCOME AT THE THRESHOLD ITS ELF AND THE APPELLANT CANNOT SURVIVE WITHOUT COMPLYING TO THE MANDATORY PROVISIONS OF RBI ACT (VI) THE AMOUNT IS ALLOWABLE UNDER SECTION 37 OF THE INCOME TAX ACT. 6.2 AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) HAS OBSERVED AS UNDE R: 5.1.2 I HAVE CONSIDERED THE FINDINGS GIVEN BY THE AO AND ALSO SUBMISSIONS MADE BY THE AR OF THE APPELLANT. THE HON'BLE ITAT 'B' BENCH, CHENNAI IN CONSOLIDATED ORDER IN THE CASE OF M/S. SHRIRAM CITY UNION FINANCE LTD. VIDE ITA NO.1744/MDS/2012 FOR A.Y.2 009 - 10 AND M/S SHRIRAM TRANSPORT FINANCE COMPANY LTD. VIDE ITA NO.1745/MDS/2012 FOR A.Y.2009 - 10 DATED 11.04.2013 DISMISSED THE APPELLANT'S APPEAL ON THE ISSUE OF DISALLOWANCE OF AMOUNT TRANSFERRED TO STATUTORY RESERVE IN COMPLIANCE WITH THE MANDATORY PROVI SIONS OF RBI BOTH ON THE ISSUE OF REGULAR COMPUTATION AND FOR COMPUTATION OF BOOK PROFIT. RESPECTFULLY FOLLOWING THE DECISION OF HON'BLE ITAT IN THE AFORESAID ORDERS, THE ACTION OF AO IN DISALLOWING RS.15,40,36,320/ - ON REGULAR COMPUTATION AND RS.10,32,50, 000 / - ON COMPUTATION OF BOOK PROFIT, BEING AMOUNTS TRANSFERRED TO STATUTORY RESERVE IS CONFIRMED. THIS GROUND OF APPEAL IS DISMISSED. 6.3 ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. BY REITERATING THE GROUNDS OF APPEAL, THE LD. CO UNSEL FOR THE ASSESSEE HAS PLEADED THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A) SHOULD BE REVERSED. ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THE ISSUES HAVE BEEN DECID ED IN VIEW OF THE DECISION OF THE TRIBUNAL AND THEREFORE, THE GROUNDS RAISED BY THE ASSESSEE SHOULD BE DISMISSED. I.T.A. NO S . 873 & 911 /M/ 16 13 6.4 WE HAVE HEARD BOTH SIDES, PERUSED THE ORDERS OF AUTHORITIES BELOW. WITH REGARD TO THE ISSUE OF AMOUNT TRANSFERRED TO STATUTORY RESERVE F UND UNDER NORMAL COMPUTATION AS WELL AS COMPUTATION UNDER SECTION 115JB OF THE ACT, THE AUTHORITIES BELOW HAVE FOLLOWED THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SHRIRAM CITY UNION FINANCE LTD. IN ITA NO. 1744/MDS/2012 AND M/S. SHRIR AM TRANSPORT FINANCE CO. LTD. IN ITA NO. 1745/MDS/2012 FOR THE ASSESSMENT YEAR 2009 - 10, WHEREIN, THE TRIBUNAL HAS HELD AS UNDER: 4. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. VIS - - VIS GROUND TAKEN BY THE ASSESSEE ON TRANSFER TO STATUT ORY RESERVE AND TRANSFER TO RESERVE FUND WHILE COMPUTING INCOME UNDER REGULAR PROVISIONS AND FOR ARRIVING AT THE INCOME UNDER SECTION 115JB OF THE ACT, RESPECTIVELY, THE ISSUES HAD ALREADY COME UP BEFORE THIS TRIBUNAL IN ASSESSEES APPEALS IN I.T.A. NO. 70 1/MDS/2012 AND I.T.A. NO. 702/MDS/2012. VIDE ITS ORDER DATED 28.6.2012, IT WAS HELD BY THIS TRIBUNAL AT PARAS4 TO 6 OF I.T.A. NO. 701/MDS/2012 AND I.T.A. NO. 702/MDS/2012, AS UNDER: - 4. THE COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT THE ISSUE OF DIS ALLOWANCE OF AMOUNT TRANSFERRED TO STATUTORY RESERVE AND AMOUNT TRANSFERRED TO RESERVE FUND WHILE COMPUTING NORMAL PROVISIONS AND ALSO WHILE COMPUTING THE BOOK PROFITS UNDER SECTION 115JB ARE DECIDED AGAINST THE ASSESSEE BY THIS TRIBUNAL IN THE CASE OF SHR IRAM TRANSPORT FINANCE COMPANY LTD. IN I.T.A. NO. 23/MDS/2011 DATED 10.10.2011, COPY OF THE ORDER IS PLACED BEFORE US. 5. WE HAVE GONE THROUGH THE ORDER OF THIS TRIBUNAL IN THE CASE OF THE ASSESSEE DATED 10.10.2011 AND FIND THAT THIS TRIBUNAL FOLLOWED COORDINATE BENCH DECISION IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2005 - 06 IN I.T.A. NO. 235/MDS/2009 DATED 16.07.2009, WHEREIN THIS TRIBUNAL DECIDED THE ISSUES AGAINST THE ASSESSEE. IN THAT APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: I.T.A. NO S . 873 & 911 /M/ 16 14 I. THE ORDER OF THE CIT A , TO THE EXTENT THAT IT HAS CONFIRMED I) DISALLOWANCE OF AMOUNT TRANSFERRED TO STATUTORY RESERVE `7,55,53,760/ - IN COMPLIANCE WITH MANDATORY PROVISIONS OF RESERVE BANK OF INDIA IN COMPUTING INCOME UNDER THE REGULAR PROVISIONS OF T HE INCOME TAX ACT, 1961; AND II) ADDITION OF`10,00,00,000/ - TRANSFERRED TO RESERVE FUND IN COMPUTING INCOME AND U/S. 115JB OF THE INCOME TAX ACT, IS AGAINST LAW AND FACTS OF THE CASE. THE TRIBUNAL HAS HELD AS UNDER: 2. THE ONLY ISSUE BROUGHT BEFORE US FOR ADJUDICATION IS WHETHER THE CIT(APPEALS) HAS ERRED IN CONFIRMING THE ADDITION OF AMOUNT TRANSFERRED TO STATUTORY RESERVE AS PER RESERVE BANK OF INDIA GUIDELINES. 3. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEES RELIED ON THE GROU NDS OF APPEAL AND REITERATED THE SAME AS HIS SUBMISSION. 4. ON THE OTHER HAND, THE LEARNED D.R. FILED ON RECORD COPIES OF THE ORDERS DATED 6TH FEBRUARY, 2009 AND 6TH MAY, 2009 OF ITAT, CHENNAI IN I.T.A. NOS. 570, 571, 806 &807/MDS/2008 AND I.T.A. NOS. 1 944 TO 1946/MDS/2008 RESPECTIVELY, IN THE ASSESSEES' OWN CASE. BY PLACING THE ABOVE ORDERS, THE LEARNED D.R. SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN THE SAID ORDERS AND THE ASSESSEE S APPEALS WERE DISMISSED BY UPHOLDING THE ORDERS OF THE LOWER AUTHORITIES. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THE FACTS AND MATERIAL ON RECORD INCLUDING THE ORDERS OF THIS TRIBUNAL CITED SUPRA. WE FIND THAT AN IDENTICAL ISSUE HAD BEEN CONSIDERED BY THIS TRIBUNAL IN THE SAID ORDERS AND THE APPEALS OF THE ASSESSEES WERE DISMISSED. IN I.T.A. NOS. 570, 571, 806 & 807/MDS/2008, WHILE DISMISSING THE APPEALS OF THE ASSESSEE, THE TRIBUNAL HAS OBSERVED AS FOLLOWS: I.T.A. NO S . 873 & 911 /M/ 16 15 '2.11 NOW, WE EXAMINE THE PRESENT CASE ON THE ANVIL OF ABOVE. BY NO ST RETCH OF IMAGINATION, IT CAN BE SAID THAT THE AMOUNT SOUGHT TO BE DEDUCTED HAS IN FACT NOT REACHED THE ASSESSEE. THE AMOUNT INVOLVED IS ONLY AN APPROPRIATION OUT OF COMPANY'S OWN PROFITS BEFORE DECLARATION OF DIVIDEND. THE AMOUNT HAS VERY MUCH REACHED AND IS IN THE BUSINESS OF THE ASSESSEE. RBI HAS NOT ATTACHED ANY OBLIGATION THAT THE FUND BE KEPT IN ANY EARMARKED SECURITY NOR THE PURPOSE OF UTILIZATION OF THE FUND HAS BEEN SPECIFIED. EVEN IF SOME OBLIGATION IS SUBSEQUENTLY ATTACHED FOR SPECIFIC APPROPRIATI ON OF THE FUND, IT WILL ONLY BE AN APPLICATION OF INCOME, WHICH WILL NEED TO BE DEALT WITH AS PER RELEVANT TAX LAW. THE TRANSFER OF RESERVE FUND IN THIS CASE CAN CERTAINLY NOT BE CALLED A DIVERSION OF INCOME BY OVERRIDING CHARGE. 2.12. .THE RATIO FR OM THE HON BLE APEX COURT IN THE CASE OF CIT VS. SITALDAS TIRATHDAS (41 ITR 367) AND HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF SESHASAYEE PAPER & BOARDS LTD. (237 ITR 488) IS CLEARLY APPLICABLE IN THIS CASE. THE COMPANIES ACT, 1956 ALSO MANDATES TRA NSFER TO RESERVE FUND A CERTAIN PERCENTAGE OF THE PROFITS BEFORE DECLARATION OF DIVIDEND. THE HON'BLE HIGH COURT IN THE CASE OF SESHASAYEE PAPER & BOARDS LTD. HAD HELD THAT IN SUCH A CASE, THERE IS NO DIVERSION OF INCOME BY OVERRIDING TITLE NOR CAN THE AMO UNT SET APART BE CLAIMED AS EXPENDITURE AND IT CANNOT ALSO BE STATED THAT IT WAS LOSS. THE RATIO FROM THIS DECISION IS VERY MUCH APPLICABLE IN THIS CASE, BECAUSE AS PER THE RESERVE BANK OF INDIA ACT, THE ASSESSEE HAS TO CREATE A RESERVE FUND AND TO TRANSFE R THEREIN CERTAIN PERCENTAGE OF ITS PROFITS BEFORE ANY DIVIDEND IS DECLARED. THIS TRANSFER TO RESERVE FUND WAS TO BE UTILIZED FOR SUCH PURPOSES AS SPECIFIED BY THE RESERVE BANK OF INDIA FROM TIME TO TIME. NO SUCH SPECIFICATION OF UTILIZATION. OF THAT FUND HAD BEEN ISSUED BY THE RESERVE BANK OF INDIA. HENCE, IT CANNOT BE SAID THAT THERE WAS ANY DIVERSION OF INCOME BY OVERRIDING TITLE NOR CAN THE AMOUNT SET APART BE CLAIMED AS EXPENDITURE AND IT ALSO CANNOT BE STATED THAT IT WAS A LOSS. .. . .. . .. . .. . . .. . . . 2.17 MOREOVER, AS DISCUSSED EARLIER, THIS IS ONLY AN APPROPRIATION OF PROFITS FOR PURPOSES WHICH HAVE NOT YET BEEN SPECIFIED. MOREOVER, AMOUNT INVOLVED IS VERY MUCH UNDER THE CONTROL OF THE ASSESSEE AND IS LYI NG IN ITS BUSINESS. HENCE, IN THE BACKGROUND OF AFORESAID DISCUSSION AND PRECEDENTS, WE UPHOLD THE WELL REASONED ORDER OF THE LEARNED COMMISSIONER OF INCOME I.T.A. NO S . 873 & 911 /M/ 16 16 TAX (APPEALS) IN THIS REGARD AND DECIDE THE ISSUE AGAINST THE ASSESSEES.' 6. SINCE THE FACTS IN THE PRESENT CASE ON OUR HAND ARE IDENTICAL TO THAT OF THE CASE DEALT WITH BY THE TRIBUNAL IN THE SAID ORDERS, FOLLOWING THE SAME, WE ARE DISMISSING THE APPEALS OF THE ASSESSEES. 7. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEES ARE DISMISSED. 6. RE SPECTFULLY FOLLOWING THE ORDER OF THIS TRIBUNAL IN I.T.A. NO. 235/MDS/2009 DATED 16.07.2009, WE DISMISS THE GROUNDS OF APPEALS OF BOTH THE ASSESSES ON THESE ISSUES BOTH UNDER REGULAR COMPUTATION AND WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF TH E ACT. FOLLOWING THE ABOVE ORDER, WE DISMISS THE GROUNDS OF APPEAL OF THE ASSESSEES, BOTH ON THE ISSUE OF REGULAR COMPUTATION AND FOR COMPUTATION OF BOOK PROFIT INSOFAR AS IT CONCERNS TRANSFER TO STATUTORY RESERVE AND TRANSFER TO RESERVE FUND RESPECTIVE LY. 6.5 IN VIEW OF THE ABOVE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) ON THIS ISSUE. ACCORDINGLY, BOTH THE GROUND S RAISED BY THE ASSESSEE ARE DISMISSED. 7. IN THE RESULT, THE APPEAL FIL ED BY THE REVENUE IS ALLOWED AND THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THE 9 TH DECEMBER , 2016 AT CHENNAI. SD/ - SD/ - (A. MOHAN ALANKAMONY ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 09 . 1 2 .201 6 VM/ - I.T.A. NO S . 873 & 911 /M/ 16 17 / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.