Art Leasing Ltd. vs Commissioner of Income Tax

C.N. Ramachandran Nair, J.—The question raised is whether the Income Tax Appellate Tribunal was justified in confirming the disallowance of provision for bad and doubtful debts claimed by the appellant-assessee for the assessment years 1997-98 to 2000-01. We have heard Sri T.M. Sreedharan, learned Counsel appearing for the appellant.

The appellant-assessee is a Non-Banking Financial Company (NBFC) registered with Reserve Bank of India. As a measure of control, the RBI has issued guidelines to NBFCs to create provision for bad and doubtful debts. According to the assessee, the assessee created the provisions for bad and doubtful debts in terms of the guidelines issued by the RBI in exercise of the powers conferred on the Bank u/s 45JA of the Reserve Bank of India Act, 1934 (for short ''the RBI Act''). However, in the course of assessment, the Assessing Officer noticed that the appellant/assessee has claimed deduction of the entire provision created for bad and doubtful debts in the computation of taxable income. Since the Explanation contained in Section 36(1)(vii) of the Income Tax Act prohibits deduction of any provision for bad and doubtful debts in the computation of taxable income, the Assessing Officer disallowed the claim. When the appellant filed appeals before the Commissioner of Income Tax (Appeals), following certain decisions of the Income Tax Appellate Tribunal, the CIT (Appeals) remanded the matter to the Assessing Officer directing to allow the claim of the appellant if the provisions for bad and doubtful debts were created in accordance with the RBI guidelines. The Department challenged these orders in appeals before the Income Tax Appellate Tribunal, which, allowed the appeals, following the decision of the Special Bench of Income Tax Appellate Tribunal, Delhi Bench and the decision of the Income Tax Appellate Tribunal, Chennai Bench, by reversing the order of the Commissioner of Income Tax (Appeals) and restoring the disallowance against which these appeals are filed. The appellant-assessee contended that by virtue of Section 45Q of the RBI Act, the guidelines issued by the RBI have overriding effect over the provisions of the Income Tax Act and so much so, the claim was rightly directed to be allowed by the CIT (Appeals). The further contention raised by the assessee is that by virtue of Sub-section (2) of Section 145 of the Income Tax Act, the RBI guidelines should be treated as equivalent to standards of accounting prescribed by the Government and so much so, the appellant is entitled to deduction claimed. Since the appellant''s claim is that the guidelines issued by the RBI have overriding effect over the provisions contained in the Income Tax Act, we extract hereunder Section 45Q of the RBI Act and Section 36(1)(vii) of the Income Tax Act, 1961.

Section 45Q of the RBI Act reads as follows:

Chapter III-B to override other laws.--The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the lime being in force or any instrument having effect by virtue of any such law.

Section 36(1)(vii) of the Income Tax Act reads as follows:

Other deductions.--(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28.

(vii) subject to the provisions of Sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the asscssee for the previous year:

Provided that in the case of an assessee to which Clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

Explanation.--For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.

In the first place, we are of the view that any other law referred to in Section 45Q does not cover Income Tax Act which applies to all assessees in the computation of taxable income. May be the provisions of Chapter III-B of the RBI Act has an overriding effect over the provisions of the Money Lenders Act or similar Acts made by various States, which may otherwise apply to NBFCs. The accounting standards prescribed by the RBI, so long as they are consistent with the Income Tax Act, are certainly applicable to the Income Tax Authorities in the computation of taxable income. The question is whether an express provision contained in the Explanation to Section 36(1)(vii) of the Income Tax Act, which prohibits granting deduction of any provision for bad and doubtful debts can be got over by the assessee by relying on Section 45Q of the RBI Act. In fact, Section 36(1)(viia) is a complete answer to this query raised by the appellant wherein special provisions are made in the Income Tax Act for allowing provision for bad and doubtful debts of scheduled banks, non-scheduled banks, co-operative banks, etc., to the extent permissible thereunder. In fact, u/s 36(1)(viia), the eligible Banks are authorised to create provision subject to certain limits in respect of rural advances and other loans referred to therein and claim deduction of the same. This provision clearly indicates that Parliament is well aware of the risk undertaken by the Banks in making advance to the rural sector in terms of the guidelines issued by the Government and the RBI and only such cases are treated as exception to the general provision contained in Explanation to Section 36(1)(vii), which prohibits granting of deduction of any provision for bad and doubtful debts. Unfortunately, for the appellant NBFCs are not covered by Section 36(1)(vii) of the Income Tax Act and so much so, Explanation to Section 36(1)(vii) squarely applies or in other words, the appellant NBFCs are not entitled to deduction of any provision created for bad and doubtful debts, no matter such provision is created based on the guidelines issued by the RBI. Consequently, we uphold the order of the Tribunal and dismiss the Income Tax Appeals.