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[The specified date is amended during this 2008.]

Finance Act 2008 has amended  the provision  40(i)(ia) of the I T Act.
This amendment relates to expenses being disallowed for not remitting the TDS on or before the specified date.

The specified date is amended during this 2008.
The  amended section provides for the following
1) TDS for March month shall be remitted on or before the due date of filing the return of income.
2) This is amended for the AY commencing from 2005-2006.

Prior to the amendment The provision provided the specified due date as
For all expenses booked on 31st March the time limit is 31st May,
For all expenes booked for march other than 31st is 7th April.

The following question arose because of the retrospective amendment.

This is more relevant for the FY 2004-2005. For this FY 2004-2005, There are more possibilities wherein the assessee would not have remitted the TDS before 31st May 2005 but before due date of filing the return of income.  The question is more relevant for all the Assessments that got completed for this AY 2005-2006. The statutory date for completing the assessment is  31-12-2007

1) Self assessment cases: The assessee by themselves would have disallowed such expenses based on the earlier provision. As per amended provision the assessee neednot disallow such expenses. In such a cases, Should the Assessee file a revised return?
2) Scrutiny assessment: If the assessee didnot disallow such expenses,The assessing officers would have disallowed.This is not a mistake and may not invoke provision 154. In such cases what is the remedy?. Should the assessee file a revised return?

In both cases Can the revised return be filed after the due date of assessment i.e. 31-12-2007?

I am reproducing the extract of the provision for immediate reference.

any interest, commission or brokerage, rent, royalty, fees for profes­sional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid,—

    * (A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or
    * (B) in any other case, on or before the last day of the previous year:

Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted—

    * (A) during the last month of the previous year but paid after the said due date; or
    * (B) during any other month of the previous year but paid after the end of the paid previous year,

such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.




Hope to get some light.
Sathya
vyakul@gmail.com

Sir
Many thanks for providing more reference. It will be really useful during the  hearing.
Regards
Sathya

[Conclusion]

Well, I attempted to understand and have put notes together for a better understanding  :)
The issue:
The NBFC has two categories of loans (assets) performing and non performing assets. The NBFC recognizes the interest income on these performing assets even when such interest income is not received. And, In the case of non performing assets, the interest income is credited to profit and loss account only when it is received .
The questions
1)   Is this treatment is valid and in conformity with law?
2)   Is this treatment in anyway contrary to the provision of Section 145 that rules out a concept of hybrid system of accounting?
3)   Is anything made applicable to bank can also be applied to a finance company that carries out similar activity?
The reference
1)   UCO Bank v Commissioner of Income Tax (1999) 237 ITR 889 (SC)
2)   Extract of Section 145
3)   Shakthi Finance company

The questions
Question 1. Is the treatment is valid and in conformity with law?
An explanation on the treatment of interest income for the NBFC.

1   Performing assets:
The loans that are good assets. These are  standard assets. The interest and principal is recoverable.
Interest is recognized when it is due. The income is credited to profit and loss account. All these income are realizable even if its due.
2   Non performing assets.
The loans that are classified as sticky loans. The interest and principal is doubtful to recover.
Interest income on non performing assets is credited to profit and loss account only on receipt. Interest when it is not realizable is not a real or earned income. Hence Interest is recognized only in the year when it is realized.

Interest income
Yes the treatment is valid and in conformity with law. The Income Tax levies taxes only on real income (the income that could be realized) and not on notional income. The above two classification follows the concept of realizable income or real income.  Only this provides the correct system of accounting and income. It is worthy to note that that the mercantile system of accounting does not require credit of interest on doubtful debts to profit and loss account as these are not earned.

The same treatment is affirmed by the Apex court in UCO Bank . In this case, The apex court also reviews and distinguishes the case of State Bank of Travancore.

The relevant extract of UCO Bank case are provided here for a ready reference.


On The issue  , The court observed that
The question whether interest earned, on what have come to be known as "sticky" loans, can be considered as income or not until actual realisation, is a question which may arise before several Income-tax Officers exercising jurisdiction in different parts of the country. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. The circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as a doubtful claim which need not be included in the income of the assessee until it is actually recovered.
Held that.
In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a "sticky" loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or "sticky" loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received.

And the appeal is answered in favour of assessee and against the department.

Question 2
Is this treatment in anyway contrary to the provision of Section 145 that rules out a concept of hybrid system of accounting?

The system of accounting regularly followed cannot be rejected as contrary to section 145 of the Act.
Relevant extract from the UCO Bank
We do not see any inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the Department.

It should also be noted that the Apex court in the context of the assessee crediting the interest on sticky loans to interest suspense account and not to profit and loss account treated it as a mixed system consistently followed and therefore not impermissible under section 145. Though hybrid or mixed system i.e. of both cash and mercantile system is not permissible from 1-4-1997, the system of crediting such interest on sticky loans is not a mixture of cash with mercantile system, So that it need not be taken as a barred from   1-4-1997. This is the income that is real and The real emphasis is only on the real income and its realisability and not on the notional income.

Question No 3.
Is anything made applicable to bank can also be applied to a finance company that carries out similar activity?

Non Banking finance companies also carries out a set of activities that are carried out by a bank. The Activity of making loans in NBFC is also very similar to the banks. Hence any Circular / Case law / Notification / Guideline that is made applicable to a bank could also be made applicable for a NBFC for that line of activity. Otherwise it provides for inequality and will be unconstitutional and against the principal of natural justice.
In the case of  THE HIGH COURT OF MADRAS T.C.No.311 of 2001, M/s SAKTHI FINANCE LTD, COIMBATORE Vs COMMISSIONER OF INCOME TAX, COIMBATORE The provision relating to accounting of overdue interest at the time of realization decided in favour of the NBFC assessee.
More particular it is against the department contention that the UCO Bank case could be applied only to Banks and not for NBFC.
The high court has decided this case on the basis of equality and in the principal of natural justice also.

The relevant extract is provided hereunder
17. Since the right of the assessee to change the method of accounting was warranted by the needs of business and the relevancy of the situation, unless and until the Revenue is in a position to show that the real income could be siphoned out of the systems of the accounts maintained and thereby escape the net of taxation, we do not find any hesitation in answering the question in favour of the assessee. As rightly contended by the learned counsel for the assessee, the decision reported in 237 ITR 889 (UCO BANK v. CIT), as to the system of maintenance of accounts and to adopt cash system in the case of advanced packed charges, is not confined to a case of banking institutions only, and it has force in the case of institution engaged in finance transactions

Similarity of section 145 and RBI guidelines.
Accounting standard as issued by the IT vide Notification 69 (E) dated 25/01/1996 lays down the following critical inputs :
(Relevant portions are presented)
(4) Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major considerations governing the selection and application of accounting policies are the following, namely :--
(i) Prudence.--Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information ;
...
6) For the purposes of paragraphs (1) to (5), the expressions,--
(a) "Accounting policies" means the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements ;
(b) "Accrual" refers to the assumption that revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate ;
The above is very similar to the RBI guidelines and further The explanation of the term "Accrual" relates to income that is earned.
Conclusion
The interest on performing assets are earned even if its due and could be included in the profit and loss account, while the Interest on non performing assets until received are are not real and not earned and thus cannot be included in the profit and loss. The same will be considered earned upon receipt only.

NBFC treats interest income on sticky loans (non performing assets) based on cash basis while they follow mercantile system for performing assets. It is based on prudential norms and as per the guideline of the Parent legislation "RBI".

During the course of assessment, It is usual for the Assessing officers to consider the income on sticky loans based on mercantile and charge income tax on it. They mostly rely on the supreme court judgement. They also take shelter under section 145.

There are circular from CBDT particularly 698 allow the benefit of this treatment only to banks and formal financial institution and ignored the NBFC. Though the circular draw reference to the RBI, but grossly ignored the fact that NBFC are also guided by the same regulation.

Infact it provides a inequality. It may be unconstitutional. Only experts can comment :)

So i want to know is there a case law that provides for considering the interest income on cash basis instead of accrual concept
sathya
vyakul@gmail.com

I understand that the unabsorbed depreciation could be carry forward in definite. It is not barred under section 79 (Section 79 bars only business losses). I was told  there is a SC case in this "Subhulaxmi mills" vs"CIT". Can someone provide the detailed judgement?
Thanks
sathya