1. This is an assessee's appeal directed against the order of learned CIT(A)-VII, Mumbai dated 19-6-2001 for assessment year 1998-99. The only ground raised by the assessee reads as under: (i) On the facts and circumstances of the case and in law, learned CIT(A) erred in upholding the action of the Assessing Officer of disallowing Rs. 46,77,500 being provision for irrecoverable advances made in the ordinary course of appellants business inter alia on the ground that such provision is a contingent liability and in ignoring that such provision was made in accordance with the Non-Banking Financial Companies (NBFC) guidelines issued by the Reserve Bank of India (RBI).
(ii) The appellant prays that the disallowance of Rs. 46,77,500 be deleted.
2. Briefly stated, the facts are that the assessee-company is non-banking financial company (NBFC). The assessee furnished its return of income on 27-11 -1998 declaring total incorne at Rs. Nil. In course of assessment proceedings, it was found by the Assessing Officer that the assessee-company had claimed deduction of Rs. 47,77,500 on account of provision of advances. But the same was not allowed by the Assessing Officer because it was only a provision. On appeal before learned CIT(A), it was contended by the assessee that the provision of advances was made in accordance with the NBFC guidelines issued by RBI and the debts written off clearly represented money lent by the assessee in the ordinary course of the business and on this basis it was urged before learned CIT(A) that the same merited allowance as revenue deduction.
Alternatively, it has been claimed that the same merits allowance as business loss. Reliance was placed by the assessee before learned CIT(A) on the Judgment rendered in the case of Overseas Sanmar Financial Ltd. v. Joint C/T[2003] 86ITD 602 (Chennai); but learned CIT(A) decided this issue against the assessee in view of the amended Section 36(1)(vii) of the Act with retrospective effect, as per which, a Explanation was inserted to the effect that any provision for bad and doubtful debts made in the accounts of the assessee would not be allowable. For this reason, learned CIT(A) upheld the assessment order and now, the assessee is in further appeal before us.
3. Learned AR of the assessee submitted the extracts from Taxmann's Statutory Manual, Vol.-2 (2006), pages 1667 to 1681, which contains some provisions of RBI Act, 1934. Our attention was drawn to Section 45Q of RBI Act, 1934 as appearing on page No. 1680 and it was submitted that as per this Section 45Q, Chapter OB of RBI Act, 1934 overrides other laws. Our attention was drawn to Section 45 JA of the RBI Act as appearing on page No. 1675, as per which, RBI can issue directions to all or any of the NBFC relating to income recognition, accounting standard, making of proper provision for bad and doubtful debts etc. It was submitted that RBI has issued non-banking financial company prudential norms (RBI) directions, 1998 in exercise of powers conferred by Section 45JA of the RBI Act, 1934, copy of which is appearing on page Nos. 13 to 27 of the paper book; and hence, these provisions have override effect over any other law as provided in section 45Q of the RBI Act, 1934. Our attention was drawn to clause 8 of this direction as appearing on page Nos. 20 to 22 of the paper book, as per which, detailed directions are given by RBI for making provisions with regard to loss asset, doubtful asset and sub-standard asset. It was submitted that provisions has been made by the assessee-company as per these directions, working of which is available on page No. 28 of the paper book; and hence, deduction thereof should be allowed because provision was made by the assessee as per the RBI directions, which have overriding effect. Reliance was placed on the following Tribunal Judgments in support of this contention:TEDCO Investment & Financial Services (P.) Ltd. v. Dy. CIT [2003] 87 ITD 298 (Delhi) 4. An alternative claim was made that if this amount is not allowed under Section 36(1)(vii), the same should be allowed as business loss and in support of this contention, reliance was placed on following judgments of Hon'ble Apex Court: It was also contended that the advances in this case should be treated as stock-in-trade and hence, shall be valued at market value which is nil in the present case and in support of this contention, reliance was placed on the Judgment of Hon'ble Madras High Court rendered in the case of CIT v. R.M. Meenakshisundaram . It was also contended that Explanation to Section 36(1)(vii) does not require that the debtor's account is to be squared off by passing entry in that account and, therefore, allowance under Section 36(1)(vii) still holds good even after insertion of the Explanation to Section 36(1)(vii) and in support of this, reliance was placed on the following Judgments: Industrial Credit & Investment Corporation of India Ltd. v. IAC [1990] 32 ITD 315 (Bom.) It was also contended that meaning of the term 'provision' is not defined in the Income-tax Act; and hence, definition in the Companies Act should be followed and in support of this contention, reliance was placed on the Judgment of Hon'ble Apex Court rendered in the case of Howrah Trading Co. Ltd. v. CIT . Regarding definition of the word 'provision' in Companies Act, copy of the extract from Taxman's Corporate Laws, 2005 containing two pages ie., page Nos. 1.575 and 1.576 were submitted.
5. As against this, learned DR of the revenue supported the orders of authorities below. It was submitted that provisions of Section 36(1)(vii) and its Explanations are applicable in the present case and the RBI Act cannot override Income-tax Act. Regarding the Tribunal order rendered in the case TEDCO Investment & Financial Services (P.) Ltd. (supra), it was submitted that this Tribunal Judgment is not with regard to Section 369(1)(viz); and hence, not applicable in the present case.
6. We have considered the rival submissions and have gone through various Judgments cited by both sides. This is an admitted fact that the assessee has made provision for advances by debiting Rs. 47,77,500 to the profit and loss account as appearing on page No. 4 of the paper book and on page No. 7 of the paper book, this amount is deducted from advances recoverable in cash or in kind and net amount of advances is considered in the balance sheet as asset. Provision of Section 36(1)(vii) has been amended by insertion of Explanation with retrospective effect from 1-4-1989 by the Finance Act, 2001 and as per this Explanation, bad debts written off in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee; and in the facts and circumstances of this case, this Explanation is directly applicable and provision made by the assessee is not allowable as deduction under Section 36(1)(vrz).
Regarding the Tribunal Judgment rendered in the case of Overseas Sanmar Financial Ltd. (supra), we find that this Judgment was delivered by the Tribunal on 5-2-2001; whereas, Explanation to Section 36(1)(vii) was inserted by the Finance Act, 2001; and therefore this Judgment is without considering this Explanation; and hence, not applicable in this present case. Regarding another Tribunal Judgment rendered in the case of TEDCO Investment & Financial Services (P.) Ltd. (supra), we find that the issue involved in that case was regarding not making provisions of lease rental, interest and bill discounting charges, which were not realized for more than six months as per NBFC prudential norms (RBI) directions, 1998. But the issue before us is regarding deduction under Section 36(1)(vii), wherein as per the Explanation, deduction is specifically denied with regard to provisions for bad and doubtful debts made by the assessee in the accounts. This Tribunal Judgment does not help the case of the assessee because directions issued by the RBI requires the assessee to make provisions with regard to loss asset, doubtful asset and sub-standard asset. There is no dispute for making provisions as per this direction of RBI. This is not the case of the revenue that no provisions should be made by the assessee. Case of the revenue is that no deduction is allowable under Section 36(1)(vii) with regard to these provisions because the same is specifically debarred by the Explanation inserted in Section 36(1)(vii). The directions issued by the RBI requires making of provisions as per the directions and to that extent, there is no conflict between directions of RBI and Income-tax Act. Regarding granting of deduction from taxable income, there is no direction issued by the RBI under Chapter IIIB of RBI Act; and hence, this Tribunal order is not applicable in the present case. Regarding the definition of word 'provisions' and its interpretation, we find that as per the Extracts from Taxman's Corporate Laws, 2005, submitted by learned AR of the assessee, the expression 'provision' shall mean any amount written off by way of providing depreciation, renewal, diminution in value of asset and if such provision is in excess of amount, which is considered reasonable, the same shall be treated as reserve and not as provision.
We find no ambiguity with regard to this definition of word 'provision' as per the Companies Act because as per this interpretation, given in the Companies Act also, the amount debited by the assessee to the profit and loss account is a provision because the same is for providing for diminution of value of asset and since, as per the Explanation to Section 36(1)(vii), provision for bad and doubtful debts is not allowable as deduction, this definition of the word 'provision' in the Companies Act and the Judgment in the case of Howrah Trading Co.
Ltd. (supra) does not help the case of the assessee. Contention of the assessee is that even after insertion of the Explanation to Section 36(1)(vii), deduction is allowable under this section with regard to provision made, but we find no merit in this contention of learned AR of the assessee. Various Judgments relied upon by the learned AR of the assessee ie., Judgment of Hon'ble Gujarat High Court rendered in the case of Vithaldas H. Dhanjibhai Bardanwala (supra) Judgment of Hon'ble Bombay High Court in the case of Jwala Prasad Tiwari (supra) and Judgment of the Tribunal in the case of lCICI Ltd. (supra) are not applicable in the present case because all these Judgments were rendered prior to the insertion of the Explanation to Section 36(1)(vii) by the Finance Act, 2001 with retrospective effect 1-4-1989.
In view of the above discussion, we are of the considered opinion that the claim of the assessee for allowing deduction under Section 36(1)(vii) is not acceptable in view of the Explanation to Section 36(1)(vii).
7. Now, we deal with the alternative claim of the assessee that this provision should be allowed as business loss. In support of this contention, the assessee has relied upon the Judgment of Hon'ble Apex Court rendered in the cases of Badridas Daga (supra) and Calcutta Co.
Ltd. (supra). Both these Judgments do not help the case of the assessee in the present case because in the case of Badridas Daga (supra), the issue involved was not regarding provision for bad and doubtful debts; but loss sustained by the assessee as a result of mis-appropriation by the agent. It was held in this case on page No. 15 of the report that deduction should be allowed having regard to accepted commercial practice and trading principles, provided of course that there is no prohibition against it, express or implied. In the present case, deduction is specifically denied as per the Explanation to Section 36(1)(vii); and hence, the same cannot be allowed as business loss.
Similarly, in the case of Calcutta Co. Ltd, (supra), it was held by the Hon'ble Apex Court that deduction can be allowed with regard to expenses incidental to the business provided, there is no prohibition against it, expression or implied; and hence, this Judgment is also not applicable in the present case. In view of the above discussion, we are of the considered opinion that since, deduction with regard to provision made for bad and doubtful debts is specifically debarred by the Explanation to Section 36(1)(vii), the same cannot be allowed as business loss also. Now we deal with remaining one contention of the assessee that in money lending business, "Advances" is to be treated as stock-in-trade and should be valued as per market value. Reliance was placed by the assessee in this regard on the Judgment of Hon'ble Madras High Court rendered in the case of R.M. Meenakshisundaram (supra). We find that the issue involved in this case was whether the interest income in the case of the assessee who is carrying on business of money lending should be treated as business income or income from other sources; and it was held that since, the assessee is carrying on business of money lending, interest received on this loan constituted business income. From this discussion, it is clear that this Judgment is not applicable in the present case because in the present case, there is no dispute regarding head of income; but the dispute is regarding provision for bad and doubtful debts and its allowability as deduction. Accordingly, these alternative contentions of the assessee are also rejected and we uphold the order of the learned CIT(A) on this issue.