LIC HOUSING FINANCE LTD,MUMBAI vs. DCIT CIR 2(2), MUMBAI

The Learned CIT(A) erred confirming addition of interest of Rs.7,37,92,296/- on non-performing assets under Section 43D of Income Tax Act read with Rule 6EB without appreciating the fact that the Appellant had consistently followed the accounting policy of accruing interest on NPA on realization which is also in compliance with mandatory NHB guidelines, AS 9 and other applicable accounting standards, provisions of the Companies Act and Income Tax Act. Without prejudice, ld. CIT(A) failed to appreciate that: - (a) Section 43D inserted by finance act 1999 to provide tax incentives for promotion of housing is not a charging section and can be invoked only when income is recognized by the assessee in which case assessee is given relief under section 43D so as to tax the interest income on doubtful debts only when it is realized. (b) Section 43D cannot be read in contradiction to norms prescribed by NHB. (c) after insertion of Section 43D method of accounting followed by the appellant was categorically accepted by the Department in earlier years (d) notional interest on NPA, if taxed in the hands of the assessee, then correspondingly same amount should be allowed deduction as bad debts under section 36(1)(vii). 3.2 Ground No. 2(c) require determination of the expression general reserves which has already been dealt with us by in AY 2004-05. The question being identical, our adjudication as for AY 2004-05 shall mutatis mutandis apply to this year also. This ground is decided against the assessee.

The Legislature having laid down the broad principles of its policy in section 43D(b) of the Act, has left the details to be supplied by the rule making authority. What is delegated to the rule making authority is the power to determine, the debts which can be considered as bad and doubtful, interest income on which can be considered as not having accrued, to an assessee following mercantile system of accounting. In doing so, the rule making authority has been directed to have regard to the guidelines issued by the NHB in relation to such debts. Section 43D of the Act, does not mandate the rule making authority to follow the guidelines issued by the NHB in relation to bad and doubtful debts. In exercise of such power the rule making authority has enacted Rule 6EB of the Rules. The rule so enacted originally was in conformity with the guidelines issued by NHB. The guidelines were revised by NHB in the year 2004 but the rule making authority did not think it fit to revise the rules to be in conformity with the revised guidelines. In our view it cannot be said that the guidelines of the NHB as and when they are revised have to be treated by implication incorporated in Rule 6EB of the Rules. NHB is not the rule making authority for the purposes of section 43D of the Act. The discretion is left to the rule making authority to follow or not follow the guidelines of NHB as and when they are revised. The purpose of classification of debts as bad and doubtful by the NHB and the purpose of not recognising LIC Housing Finance Ltd. Assessment Years :2004-05 & 2005-06 interest income for the purposes of the Act, are different. The considerations that weigh with the relevant authorities are also different. Therefore, it cannot be said that the rule making authority under the Act has to automatically follow the guidelines of NHB as they exist from time to time. In that view of the matter, we cannot agree with the submission of the learned counsel for the assessee, that the guidelines issued by the NHB, has to be read as part of section 43D of the Act. We cannot also agree that the expression "Having regard to" used in section 43D of the Act, means that the rule making authority should amend the rules as and when the guidelines of NHB are revised or that we have to read the guidelines of NHB as part of section 43D of the Act.

We have also considered the decisions relied upon by the learned counsel for the assessee. In the case of Delhi Farming & Construction (P.) Ltd. (supra) and Rajesh Kumar (supra) , the expression "having regard to" was considered to have a broader meaning because of the discretion inherently necessary in discharge of the power. In fact the decisions seem to suggest that the rule making authority in the present case, need not be bound by the guidelines of NHB and can take into other considerations while prescribing, what are the criteria for determining what are bad and doubtful debts for the purpose of section 43D of the Act. The decision in the case of Bombay State Transport Corporation (supra) is a case where there was conflict between the rules and the Act and as rightly submitted by the learned D.R. that decision is not of any assistance to the plea of the assessee before us.

The next aspect which needs to be considered is as to whether on the facts and circumstances of the case even de hors section 43D can it be said that no income accrued to the assessee and can it be said that by applying the real income theory the interest income in question cannot be brought to tax. In this regard at the outset we have to bear in mind that accrual under the mercantile system of accounting depends on the legal right to receive and the inability of the debtor to make payment will have no effect on the legal right of the creditor to receive. In State Bank of Travancore (supra), the Hon'ble Supreme Court had to deal with accrual of income in the context of interest on bad or doubtful debts in the case of Banks. The facts were that the assessee which was a subsidiary of the State Bank of India maintained accounts on mercantile system making entries on accrual basis. It adopted the calendar year as its previous year and the calendar years 1964, 1965 and 1966 for which assessment years 1965-66, 1966-67 and 1967-68 were the relevant A.Y. In the course of its banking business, the assessee charged interest on advances considered doubtful of recovery, otherwise called sticky advances, by debiting the concerned parties but instead of carrying it to its profit and loss account credited the same to a separate account styled "Interest Suspense Account" as the principal amounts of these sticky advances themselves had become, not bad or irrecoverable but extremely doubtful of recovery. However, in its returns, the assessee disclosed such interest separately and claimed that the same was not taxable in its hands as income for the concerned years. The Hon'ble Supreme Court on the taxability of interest income on accrual basis held as follows: "(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the LIC Housing Finance Ltd. Assessment Years :2004-05 & 2005-06 concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry-but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits. We were invited to abandon legal fundamentalism. With a problem like the present one, it is better to adhere to the basic fundamentals of the law with clarity and consistency than to be carried away by common cliches. The concept of real income certainly is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of the law of income-tax as developed."

The Hon'ble Supreme Court in its later judgment in the case of UCO Bank (supra) however did not agree with the aforesaid view because one of the Circular of CBDT had been overlooked while rendering the aforesaid decision. The question before the Hon'ble Court was as to whether interest on a loan whose recovery is doubtful and which has not been recovered by the assessee-bank for the last three years but has been kept in a suspense account and has not been brought to the profit and loss account of the assessee, can be included in the income of the assessee for the assessment year 1981-82. The Central Board of Direct Taxes had issued Circular No. 41 (V-6) D of 1952, dated October 6, 1952. The circular, inter alia, stated that "interest accruing to a money-lender on loans entered in the suspense account because of the extreme unlikelihood of their being recovered need not be included in the assessee's taxable income if the Income-tax Officer is satisfied that there is really little probability of the loans being repaid. It was considered desirable to extend this principle to banks which, instead of transferring the doubtful debts to a suspense account, credit the interest on such debts to that account provided the Income-tax Officer is satisfied that recovery is practically improbable." This circular was in force till June 20, 1978, when the Central Board of Direct Taxes issued a circular dated June 20, 1978, withdrawing with immediate effect the earlier circular of October 6, 1952. The reason for the withdrawal of the circular of 1952 was the decision of the Kerala High Court in State Bank of Travancore v. CIT [1977] 110 ITR 336 wherein a view was expressed that in such cases income would accrue under mercantile system of accounting. The Central Board of Direct Taxes, however, issued another circular of October 9, 1984, under which the Central Board of Direct Taxes decided that "interest in respect of doubtful debts credited to suspense account by the banking companies will be subjected to tax but interest charged in an account where there has been no recovery for three consecutive accounting years will not be subjected to tax in the fourth year and onwards. However, if there is any recovery in the fourth year or later the actual amount recovered only will be subjected to tax in the respective years. This procedure was to apply to the assessment year 1979-80 and onwards. The Board's Instruction No. 1186, dated June 20, 1978, was modified to this extent". The same circular further clarified that up to the assessment year LIC Housing Finance Ltd. Assessment Years :2004-05 & 2005-06 1978-79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board's earlier circular dated October 6, 1952, as the said circular was withdrawn only in June, 1978. The new procedure under the circular of October 9, 1984, will be applicable for and from the assessment year 1979-80. The Hon'ble Supreme Court held as follows: "Section 119(1) of the Income-tax Act, 1961, provides that, "the Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board. Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner ; or (b) so as to interfere with the discretion of the Appellate Assistant Commissioner in the exercise of his appellate functions". Under sub-section (2) of section 119, without prejudice to the generality of the Board's power set out in sub-section (1), a specific power is given to the Board for the purpose of proper and efficient management of the work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases, setting forth directions or instructions, not being prejudicial to assessees, as to the guidelines, principles or procedures to be followed in the work relating to assessment. Such instructions may be by way of relaxation of any of the provisions of the sections specified there or otherwise. The Board thus has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Income-tax Act which are binding on the authorities in the administration of the Act. Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. Thus, the authority which wields the power for its own advantage under the Act is given the right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law or in other permissible manners as laid down in section 119. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities. 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 LIC Housing Finance Ltd. Assessment Years :2004-05 & 2005-06 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."

On the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore (supra), the Court held as follows : "The first decision is the majority judgment in State Bank of Travancore v. CIT [1986] 158 ITR 102, decided by a Bench of three judges of this court by a majority of two to one. This judgment directly deals with interest on "sticky advances" which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on "sticky" advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 1984, does not appear to have been pointed out to the court. What was submitted before the court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged "in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility". The court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this court in Navnit Lal (C.) Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 , or the subsequent decision in K.P. Varghese v. ITO [1981] 131 ITR 597 (SC), also do not appear to have been pointed out to the court. Since the later circular of October 9, 1984, was not pointed out to the court, the court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under section 119 of the Income-tax Act were not placed before the court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and make the application of the LIC Housing Finance Ltd. Assessment Years :2004-05 & 2005-06 fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K.K. Sen [1965] 56 ITR 198 (SC)."

We agree with the submissions of the learned D.R. that the decision of the Hon'ble Supreme Court in the case of UCO Bank (supra) does not obliterate the ratio of the very same Hon'ble Court in the case of State Bank of Travancore (supra) but only modifies the same insofar as a later circular which is benevolent had not been brought to the Hon'ble Courts notice. In that view of the matter, we agree with the submission of the learned D.R. that real income theory would be relevant but would have no application so as to defeat the provisions of the Act. In our view provisions of section 43D lay down the limits up to which interest income of bad and doubtful debts in the case of public companies need not be recognised as income, in a case where assessee follows mercantile system of accounting. By implication it also lays down that any claim that interest income as not having accrued over and above the limits laid down by the Rules, should not be accepted. The claim of the assessee in our view is therefore contrary to the provisions of section 43D and the claim of the assessee based on real income theory and there being no real accrual of income cannot be accepted.

That leaves us with the decision of the Hon'ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) and the Hon'ble Madras High Court in the case of Elgi Finance Ltd. (supra). In the case of Vasisth Chay Vyapar Ltd. (supra), the assessee was a non- banking finance company bound by the provisions of the Reserve Bank of India Act, 1934. In compliance with the Directions issued by the RBI under the RBI Act, 1934, it did not recognise interest on intercorporate deposit as income. The Hon'ble Delhi High Court held that interest income does not accrue and the action of the assessee was correct. To the same effect is the decision of the Hon'ble Madras High Court in the case of Elgi Finance Ltd. (supra). The Hon'ble Delhi High Court considered the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) and explained that the case decided by the Hon'ble Supreme Court involved a case where provision on account of Non- Performing assets was claimed as a deduction, which was held by the Court to be not allowable. The Hon'ble Court found that a deduction claimed under the Act had to satisfy the conditions laid down under the Act and prudential norms of RBI will not override the provisions of the Act. But when it comes to "income recognition" prudential norms will be relevant. As rightly contended by the learned D.R. the issue before the Hon'ble Delhi High Court was not in relation to provisions of section 43D and therefore the ratio laid down by the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) would apply. The Hon'ble Delhi High Court was dealing with a case where there was a conflict between theory of "income recognition" and prudential norms of the RBI. In the present case, we are concerned with the provisions of section 43D vis-a-vis the guidelines of NHB regarding bad and doubtful debts. The Hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) had to deal with deduction on account of claim for deduction on account of provision for Non-Performing Assets in terms of RBI directions issued under the RBI Act, LIC Housing Finance Ltd. Assessment Years :2004-05 & 2005-06 1934. The Hon'ble Court found that under Explanation to section 36(1)(vii) of the Act, provision for doubtful debt was kept out of the ambit of bad debt written off. It was further held that under the Act, tax is on "real income" i.e., profits arrived at on commercial principles subject to the provisions of the Act. Real profits can be arrived at only by making the permissible deductions. Since the provision for bad debt was not a permissible deduction under the Act, the same was held to be not allowable. The "real income" referred to by the Hon'ble Supreme Court in its judgment in paras 35 to 39 is in the context of profits arrived at on commercial principles subject to the provisions of the Act. The provisions of section 43D lay down the limits up to which interest income of bad and doubtful debts in the case of public companies need not be recognised as income, in a case where assessee follows mercantile system of accounting. By implication it also lays down that any claim that interest income as not having accrued over and above the limits laid down by the Rules, should not be accepted. The claim of the assessee in our view is therefore contrary to the provisions of section 43D and cannot therefore the claim of the assessee based on real income theory and there being no real accrual of income cannot be accepted. Thus the decision of the Hon'ble Delhi High Court and the Madras High Court will not be applicable to the facts of the present case. Rather the decision of the Hon'ble Supreme Court in the case of Southern Technologies (supra) alone will apply. We therefore reject the contention raised on behalf of the learned counsel for the assessee. For the reasons stated above, we uphold the order of CIT(A) and dismiss the appeal by the assessee. Nothing on record suggest that the aforesaid ruling has subsequently been reversed by any judicial authority or the same is not applicable to the fact the present case. 4.7 Besides the decision of Hon’ble Delhi High Court which has already been considered in the above decision, Ld. AR has also relied upon the decision of Hon’ble Punjab & Haryana High Court in Ludhiana Central Co-op Bank Ltd. (99 Taxmann.com 81), the decision of Hon’ble Bombay High Court in India Debt Management Pvt. Ltd. (ITA No 266 of 2017 dated 15/04/2019) and the decision of Hon’ble Bombay High Court in Solapur District Central Co-op. Bank Ltd. (102 Taxmann.com 440). However, upon careful study of the decisions rendered by Hon’ble Courts, we find that the said decisions do not address the conflict under hand and they are primarily concerned with concept of income recognition vis-à-vis provisioning norms issued by LIC Housing Finance Ltd. Assessment Years :2004-05 & 2005-06 RBI. No such conflict, as in the present case, is found to be present in these decisions. Similarly, the decision of Kolkata Tribunal in DCIT V/s The Royal Bank of Scotland (ITA No. 496/Mum/2015 14/10/2016) has been rendered in the context of Rule 6EA and do not address the conflict before us. This decision has been followed by Chennai Tribunal in The Karur Vysya Bank Ltd. (ITA Nos. 2325-36/Mds.2016 29/03/2017). Similar is the position of other decisions cited by Ld. AR, before us. Therefore, no guidance could be obtained from all these decisions to resolve the controversy before us. 4.8 During the course of hearing, a decision of Hon’ble Delhi High Court rendered in Housing & Urban Development Corporation Ltd. V/s Addl. CIT (83 Taxmann.com 292 dated 03/07/2017), which is directly on the point favoring revenue, was brought to the notice of the bench. However, it is found that the operation of the said order has subsequently been stayed by Hon’ble Apex Court in Special Leave Petition (Civil) Diary No. 24914/2-18 dated 06/08/2018 by observing as under: - Delay condoned Issue notice. There shall be stay of operation of the order passed by the High Court, in the meantime.

Resultantly, Ground No. 4 stand dismissed. The appeal remain partly allowed. Conclusion 6. The grounds in both the years as stated above, stand dismissed. Both the appeals remain partly allowed.