Southern Technologies Ltd vs. JCIT (Supreme Court)

DATE: (Date of pronouncement)
DATE: January 12, 2010 (Date of publication)

Click here to download the judgement (southern_technologies_rbi_nbfc_npa_provisions.pdf)

Provisions for NPA as per RBI Norms by NBFCs is not deductible

The assessee, a NBFC, made a ‘Provision for NPA’ in terms of the RBI Directions 1998. It claimed a deduction for the said provision u/s 36 (1)(vii) on the ground that as it was debited to the P&L Account and reduced the profits, it was a ‘write off’. In the alternative, it was claimed that there was a diminution in the value of its assets for which a deduction u/s 37 as a trading loss was eligible. It was also claimed that the RBI Directions overrode the I. T. Act. The Tribunal allowed the claim but the High Court rejected it. On appeal, HELD dismissing the claim:

(i) The RBI Directions issued u/s 45JA of the RBI Act provide that anticipated losses must be taken into account but expected income need not be taken note of. This is for ensuring that NBFCs state true and correct profits without projecting inflated profits. These are prudential norms or disclosure norms but have nothing to do with the computation or taxability of the provisions for NPA under the IT Act. Further though the RBI Directions deviate from the accounting practice as provided in the Companies Act, they do not override the provisions of the IT Act. The RBI Directions 1998 and the IT Act operate in different fields.

(ii) The “Provision for NPA” made in terms of the RBI Directions does not constitute expense for purposes of s. 36(1)(vii). The said Provision is for presentation purposes and in that sense it is notional.

(iii) The argument that a provision for NPA under commercial accounting is not “income” hence on the basis of “Real Income Theory” it cannot be added back has no merit. Though profits have to be computed on commercial principles and on real income basis, this is subject to the provisions of the Act. A provision for NPA is only a notional expense. Further, under the Expl to s. 36(1)(vii) a provision for doubtful debt is not allowable. For the same reason, deduction can also not be claimed u/s 37 (1).

(iv) The argument of the NBFCs that the non-grant of benefits u/ss 36 (1)(viia) & 43D to NBFCs and confining such benefits to banks, SFCs, HFCs violates Articles 14 & 19 of the Constitution has no merit. As regards Art 14, the business operations of NBFCs and banks are quite different and they satisfy the test of “rational and intelligible differentia” having nexus with the object sought to be achieved. As regards Art 19 (1), keeping in mind the important role assigned to banks in the economy and the fact that NBFCs are vulnerable to economic and financial uncertainties, the restriction placed on NBFC by not giving them the benefit of deduction satisfies the principle of “reasonable justification”. Further, laws relating to economic activities should be viewed with greater latitude than other laws.

Note: The judgement of the Special Bench in New India Industries 112 TTJ (Del) 917 is impliedly approved. See also TN Power Finance & Infrastructure 280 ITR 491 (Mad)