Commissioner of Income Tax vs Karnataka Bank Ltd.

N. Kumar, J.

All these appeals are preferred by the Revenue, challenging the order passed by the Income Tax Appellate Tribunal, Bangalore (hereinafter referred to as ''the Tribunal'' for short), granting relief to the assessees. The five substantial questions of law, which arise for consideration in all these appeals, are as under:

"(1) Whether the Appellate Authorities were correct in reversing the finding of the Assessing Officer that the Assessee was following dual method of Accounting i.e., one method to arrive at book profits and another method to arrive at taxable income which was not permissible as per Section 145(1) of the IT Act after amendment which was rectified resulting in addition of Rs. 27,76,88,836/-?

(2) Whether the appellate authorities were correct in holding that no expenditure can be allotted to the exempted income earned by the assessee when the Assessing Officer had worked out 5% and the appellate Commissioner had worked out at 2.5% despite assessee incurring expenditure for earning such income?

(3) Whether the appellate authorities were correct in holding that Bad debts of Rs. 99,34,910/- was an allowance deduction u/s. 36(1)(vii) of the Act despite the same having been deducted by the Assessee in the computation made under Section 36(1)(viia) of the Act?

(4) Whether the appellate authorities were correct in holding that excessive claim under proviso to Section 36(1)(viia) of the Act is allowable despite the assessee claiming deduction under Section 36(1)(viia) of the Act which would amount to double deduction when the section contemplated either one of the dedn. contemplated in Section 36(1)(viia) or Proviso to Section 36(1)(viia) of the Act?

(5) Whether the Tribunal was right in holding unrealized lease rentals on NPA''s is allowable deduction despite the same not having not accrued and not satisfying Section 43D and RBI Guidelines which did not equate unrealized lease rental of NPA''s with that of bad and doubtful debts as claimed by the Assessee?"

The substantial questions of law-1, 2, 3 and 4 arose for consideration in the assessee''s case itself in I.T.A. Nos. 675 and 657/2008. By an elaborate judgment, this Court considered the said questions of law and by an order dated 1st July, 2004 has answered the first and second substantial questions of law in favour of assessee and against the Revenue. Insofar as third and fourth substantial questions of law are concerned, this Court had remanded the matter to the Assessing Authority and directed the Assessing Authority to decide the said questions of law in terms of the judgment of the Hon''ble Supreme Court in the case of Catholic Syrian Bank Ltd. Vs. Commissioner of Income Tax, Thrissur, . Accordingly, in these cases also, the substantial questions of law-1 and 2 are answered in favour of the assessee and the substantial questions of law-3 and 4 are not answered as the impugned order on that aspect is set aside and the matter is remanded to the Assessing Authority for fresh disposal and in accordance with law. Therefore, the only question of law that remains for consideration by this Court for the first time is the fifth substantial question of law.

The assessee is one of the leading Scheduled Commercial Banks in the Private Sector of the Region. The income has been returned from regular banking business, lease rentals and income from house property. The assessee - Bank has furnished a statement showing the details of lease rental along with the return of income. While computing the total lease rental receivable, the assessee has made adjustments by way of claiming deduction for unrealized lease rentals on the assets, which have been classified as non-performing. The assessee claims disallowance of the unrealized lease rentals of NPA''s. The Assessing Authority held that Section 43D of the Income-tax Act (for short hereinafter referred to as ''the Act'') deals with the taxability of bad debts recovered and not with the allowability of the claims, that too, the Section is very specific only on the income by way of interest in relation to bad debts or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts. Nowhere in the Section there is any mention about these lease rentals and therefore, he disallowed the claim with respect to unrealized lease rentals and added back the said amount to the total taxable income of the assessee. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals).

The First Appellate Authority held that the assessee claimed for deduction in respect of unrealized lease rentals on the NPAs, which is found to be in accordance with the guidelines and the instructions issued by the Reserve Bank of India, which is empowered to deal with such matters in terms of Section 43D of the Act. In fact, in the earlier years, the unrealized lease rentals were allowed. Therefore, following the said judgment, the claim of the assessee towards unrealized lease rentals was directed to be allowed. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal.

The Tribunal at para-9 of the impugned order extracted Section 43D of the Act and held that the said Section clearly implies that to the extent that have been written off under Section 36(1)(vii) would be allowed subject to the condition that in the year of actual receipt, it would be taxed and therefore, upheld the order of the First Appellate Authority on this aspect of the matter. Aggrieved by the said order, the Revenue is in these appeals.

The learned Counsel for the Revenue assailing the impugned order contended that, a reading of Section 43D of the Act makes it clear that, it applies only to the income by way of interest and it is not applicable to the unrealized lease rentals and therefore, he submits that the impugned order requires to be set aside on this aspect.

Per contra, learned Senior Counsel appearing for the assessee submitted that, a reading of the Section makes it clear that the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts shall be chargeable to tax and the Reserve Bank of India by its letter dated 17th July, 1989 have categorically stated that, treatment of leasing activity is on par with loans and advances and therefore, what applies to interest on loans should equally apply to the lease rentals. In fact, this stand of the assessee has been accepted by the authorities for the earlier period and in fact, they did not challenge the said finding before this Court, though they preferred an appeal challenging the finding of the Tribunal on other aspects and therefore, he submits that the order passed by the Tribunal is in consonance with the guidelines issued by the Reserve Bank of India and therefore, no case for interference is made out.

Section 43D of the Act is a special provision dealing with income of public financial institutions, public companies, etc. It reads as under:

"43D. Special provision in case of income of public financial institutions, public companies, etc.-Notwithstanding anything to the contrary contained in any other provision of this Act,-

(a) in the case of a public financial institution or scheduled bank or a State financial corporation or a State industrial investment corporation, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts;

(b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the National Housing Bank in relation to such debts,

shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation or the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier."

A reading of the aforesaid provision makes it clear that, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institutions as mentioned in the said Section to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier. Therefore, it is clear that the said benefit is not conferred on the assessee in respect of all categories of bad and doubtful debts. It is restricted to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts.

Rule 6EA of the Income-tax Rules (for short hereinafter referred to as ''the Rules'') prescribes the nature of bad and doubtful debts of financial institutions to which Section 43D of the Act is made applicable. Rule 6EA reads as under.

"6EA. Special provision regarding interest on bad and doubtful debts of financial institutions, banks, etc. - The provisions of Section 43D shall apply in the case of every public financial institution, scheduled bank, State financial corporation and State industrial investment corporation where its income by way of interest pertains to the following categories of bad and doubtful debts, namely:--

(a) (i) Non-viable or sticky advances, i.e., where irregularities of the nature specified in sub-clause (ii) are noticed in the accounts of the borrowers for a period of six months and more and there are no minimum prospects of regularization of accounts, or where the accounts or information in relation to such accounts reflect usual signs of sickness, such as,-

(1) apparent stagnation in the business as a result of the slow or negligible turnover;

(2) frequent requests for overdrawing or issue of cheques without ensuring availability of funds in the account;

(3) bills purchased or discounted remain overdue for 3 months and more or the recovery of such bills from the borrower poses difficulties;

(4) in the case of term-loans, installments which are overdue for 6 months or more;

(5) unexplained delays by the borrower in submission of quarterly or half-yearly operating statements or stock statements or balance sheets and other information required by the bank;

(6) slow movement or stagnation of stocks observed during inspections;

(7) low or negligible level of activity observed during inspections or suspension or closure of the business;

(8) persistent delay in compliance with vital requirements like execution of documents, producing additional security when required or non-compliance with such requirements;

(9) diversion of funds to sister units or acquiring capital assets not relevant to the business or large personal withdrawals by the borrowers;

(10) intentional non-adherence to project schedules leading to substantial cost escalations and requirement of additional term-finance;

(11) the pressure on the liquidity leading to non-payment of wages to workers or statutory dues or rents of office and factory premises;

(12) the current liabilities exceeding current assets;

(13) any grave irregularities observed by the auditors of the borrowers which remain to be rectified;

(14) basic weakness revealed by the financial statements of the unit, for example, continued cash loss beyond one year.

(ii) The irregularities referred to in sub-clauses (i) in the accounts of the borrowers are, -

(1) where the accounts are overdrawn beyond the drawing power or the sanctioned limit, for a temporary period;

(2) instalments in respect of term-loans are overdue for less than 6 months or import bills under letters of credit or instalments under deferred payment carried are overdue for less than 3 months;

(3) bills not exceeding 10% to 15% of the total out standings in the bills purchased or discounted account of the borrower are overdue for payment for a period of less than 3 months and refund in respect of unpaid bills is not forthcoming immediately.

(c) Advances recalled, i.e., where the repayment is highly doubtful and revival of the unit is not considered worthwhile and a decision has been taken to recall the advances.

(d) Suit-filed accounts, i.e., where legal action or recovery proceedings have been initiated and suits are pending for recovery of advances.

(e) Decreed debts, i.e., where suits have been filed and decree obtained and such decree is pending for execution.

(f) Debts recoverability whereof has become doubtful on account of shortfalls in value of security, difficulty in enforcing and realizing the securities, or inability or unwillingness of the borrower to repay the banks dues, partly or wholly, and such debts have not been included in preceding clauses (a) to (d)."

A reading of the aforesaid provision explicitly makes it clear that Rule also applies to income by way of interest only. While prescribing those bad and doubtful debts, the rule making authority has taken into consideration the guidelines issued by the Reserve Bank of India in relation to such debts. Therefore, what follows is Section 43D is not applicable to all bad and doubtful debts. It applies only to such bad and doubtful debts as prescribed under the Rule 6EA of the Rules. The said rules are framed by the rule making authority on the basis of the guidelines issued by the Reserve Bank of India in relation to such debts. Therefore, we have to look into the guidelines issued by the Reserve Bank of India only to find out in respect of which bad and doubtful debts, the benefit of Section 43D is attracted. All the guidelines issued by the Reserve Bank of India in respect of other bad and doubtful debts have no relevance in interpreting Section 43D(a) of the Act is concerned. The Reserve Bank of India has addressed a letter dated 17th July, 1999 to all commercial banks regarding "equipment leasing activity - accounting/provisioning norms". It is stated that, with a view to bringing uniformity in the accounting practices followed by banks undertaking leasing activity departmentally, it has since been decided that banks should follow the "Guidance Note on Accounting for Leases" issued by the Institute of Chartered Accountants of India (ICAI). It is made clear that the instructions on treatment of leasing activity on par with loans and advances would continue to remain in force. Moreover extant guidelines in regard to income recognition, asset classification and provisioning would continue to be applicable to lease transactions of banks. It is further stated how the recognition of income in case of non-performing leased assets is to be accounted for. It says, the net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became non-performing, and remaining unrealized, should be reversed or provided for in the current accounting period. Therefore, there is a communication issued by the Reserve Bank of India to all commercial banks calling upon to follow the "Guidance Note on Accounting for Leases" issued by the ICAI, making it clear that their earlier instructions on treatment of leasing activity on par with loans and advances would continue to remain in force. Therefore, the said communication/guidelines has no bearing in understanding Section 43D of the Act. When the legislature has expressly used the words "income by way of interest" in Section 43D of the Act, if we had to include in that Section the unrealized rentals from equipment leasing activity, it would amount to the Court rewriting the Section, which is impermissible in law. In fact, the authorities have not carefully read the aforesaid statutory provision. It is a case of misreading the provision. A liability under the Income-tax Act cannot be foisted on the basis of analogy. Unless the statute provides, no tax to be levied. Similarly, when the statute expressly provides how the income received is to be taxed and in which year, strictly in accordance with the statutory provision, the tax has to be levied. The language employed in the aforesaid Section is simple. There is no ambiguity. We have to follow the words used in that Section. There is no scope for interpretation at all. Hence, the impugned order passed by the Appellate Authorities cannot be sustained. Accordingly, the fifth substantial question of law is answered in favour of the Revenue and against the assessee. To that extent, the appeals succeed and the impugned order on that aspect only is hereby set aside.

Ordered accordingly.