By TIOL News Service

NEW DELHI, MAY 03, 2018: THE ISSUE IS - Whether the provisioning norms issued by RBI with respect to 'income recognition' can also be used while computing taxable income under I-T Act. NO IS THE VERDICT.

Facts of the case:

The assessee, a Non-Banking Financial Company (NBFC), was bound by directions of the Reserve Bank of India (RBI). It returned income for the relevant AY. During the assessment proceeding, the AO noted that the assessee had advanced certain amounts to M/s Jindal Equipment Leasing & Consultancy Services Ltd. and Mansarovar Investment Ltd. during the previous year relevant to the AY 1997-98 and accrued interest uto AY 1998-99. Further, the assessee had again advanced loans to M/s Goswami Credits & Investment Ltd. during the previous year relevant to AY 1999-2000 upon which interest was accrued till AY 2001-02. However, the assessee had not received interest for more than six months. Accordingly, as per the RBI's direction, the assessee treated such loan advances as Non Performing Assets (NPA). The assessee had followed the mercantile system of accounting and hence, did not showed interest income. Pursuant to the same, the AO held that the assessee had accrued interest and thus, added interest to the assessee's income. On appeal, the CIT(A) upheld the AO's action. However, on further appeal, the Tribunal deleted such interest income.

the High Court held that,

++ in the case of Southern Technologies, the Apex Court has held that "... in essence RBI Directions 1998 are Prudential/ Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition ... these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income ... The accounting policies adopted by an NBFC cannot determine the taxable income. It is well settled that the accounting policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the RBI Directions 1998 in view of Sec. 45Q of the RBI Act. Hence, as far as Income Recognition is concerned, Sec. 145 of the IT Act has no role to play in the present dispute ..." ;

++ in the absence of any findings that the cross holdings of the debtor companies was the predominant or sole reasoning for the assessee's inability to recover its dues, is bound by the reasoning in the case of Vishisht Chay Vyapar; more so, given that the Supreme Court has given its imprimatur on that ruling. For these reasons, the Revenue's appeal has to fail; the question of law is answered against it.

(See 2018-TIOL-820-HC-DEL-IT)