NPA interest write off-Income Tax Act to override NHB Act – Delhi High Court

NPA interest write off-Income Tax Act to override NHB Act. Deduction for past due interest to be based on 6 months u/s 43D read with Rule 6EB-Delhi High Court

ABCAUS Case Law Citation:
ABCAUS 1284 (2017) (07) HC

The Grievance:
The Petitioner company had filed the present petition under Article 226 of the Constitution challenging the order passed by the Respondent, Commissioner of Income Tax (‘CIT’), rejecting its application under Section 264 of the Income Tax Act, 1961 (‘the Act’).

The Issue:
The issue concerns treatment of the interest corresponding to bad and doubtful debts known as Non-Performing Assets (‘NPAs’) in banking terminology.

Important Case Laws Cited/relied upon:
Rajesh Kumar v. DCIT (2006) 287 ITR 91
Southern Technologies Ltd. v. Asstt. CIT [2010] 320 ITR 577 (SC)
TRO v. Custodian appointed under the Special Court (Trial of Offences relating to Transaction in Securities) Act, 1992 [2007] 293 ITR 369 (SC)
CIT v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 (Del.),

Brief Facts of the Case:
The present judgment involves five appeals under Section 260A of the Income Tax Act, 1961 (‘Act’) by the Housing and Urban Development Corporation Limited (‘HUDCO’) against the common judgment and order of ITAT for the Assessment Years (‘AYs’) 2005-06 to 2009-10.

HUDCO is a public sector undertaking engaged primarily in providing long-term finance for construction of houses for residential purposes or undertaking housing and urban development programmes in the country.

Assessee claimed deduction in respect of interest accrued on classified NPAs according to the guidelines of National Housing Bank (‘NHB’) issued with effect from 31st March, 2005. In the said guidelines, the debts or loan in respect of which interest had not been received beyond a period of more than 90 days were classified as NPA. Relying on the said guidelines, deduction was claimed by HUDCO.

The Assessing Officer (‘AO’), however, invoked Section 43D of the Act read with Section 6EB of the Income Tax Rules, 1962 (‘the Rules’) whereunder only if interest in respect of a debt or loan was due for more than six months could such a loan be treated as NPA. The interest corresponding to such NPA was only to be considered for deduction for non-recognition of the interest income. The AO held that the NPA was to be classified as per Rule 6EB of the Rules and not by the amended guidelines of the National Housing Bank (‘NHB’) effective from 31st March, 2005.

Contentions of the Petitioner Company:
It was submitted that CIT(A) as well as the ITAT overlooked the real income theory and erred in holding that the de-recognition of interest corresponding to the NPAs would have to be in terms of Rules only. It was pointed out that Section 43D(b) itself requires de-recognition of interest to be prescribed “having regard to” the guidelines issued by the NHB in relation to such debts. While Rule 6EB was amended to make it consistent with the guidelines, fresh guidelines issued with effected from 31st March, 2005 did not result in the corresponding amendment to the Rules. This was only done as a matter of course. He urged that a purposive construction had to be adopted and the Rules had to be interpreted in any manner beneficial to the Assessee.

Observations made by the High Court:
The Hon’ble High Court observed that while it is true that the Assessee was governed by the instructions issued by the NHB as to what should be considered as an NPA, the fact remained that as far as the permissibility of deduction for the purposes of computing the taxable income is concerned, it is the Income Tax Act that applies.

It was observed that Prior to 31st March, 2005 the criteria for terming a loan to be an NPA remained the same, both, in NHB guidelines and the Income Tax Rules (i.e., when the interest due thereon was not received for a period of more than 180 days). However, after 31st March, 2005, the period was reduced to 90 days. However, there was no corresponding change brought about in Rule 6EB.

Based on the interpretation of the Supreme Court, the Hon’ble High Court  observed that the expression “having regard to” occurring in Section 43D(b) of the Act does not imply that the Rules thereunder have to be identical to the NHB guidelines. The expression is used as not “in accordance with” but “having regard to”. It could not be said that the NHB guidelines had to be treated as having been incorporated into Rule 6EB in the sense that every amendment or modification in the NHB guidelines had to ipso facto be read into Rule 6EB.

The Hon’ble High Court  observed that the Hon’ble Supreme Court had held that the RBI Act does not override the provisions of the Income Tax Act and also it was also held by the Supreme Court that where an Act makes a provision with a non-obstante clause, that would override the provisions of all other Acts.

It was observed that in the instant case, there was no doubt that Section 36 of the NHB Act stated that the provisions of Chapter V of the NHB Act would have the effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. However, Section 30A of the NHB Act under which directions are issued by NHB to housing financial institutions, etc. does not contain a non-obstante clause. It is not meant to override Section 43D(b) of the Act in the matter of computation of taxable income.

It was further observed that Section 43D of the Act read with Rule 6EB is a complete Code in itself. There is an element of discretion for the rule making authority to follow or not to follow the NHB guidelines as and when they are revised. The purpose of classification of debts as NPA by the NHB and the purpose for non-recognition of income for the purposes of the Act are different. Given the wording of the relevant provisions of the Act and the NHB Act, it is not possible to agree to HUDCO’s proposition that with every change in the NHB guidelines there would be a corresponding automatic change in Rule 6EB.

The Hon’ble High Court concurred with the ITAT that the real income principle would have no application as far as Section 43D of the Act. A distinction is required to be drawn between the concept of ‘deductions’ claimed under the Act which has to satisfy the conditions laid down therein to qualify as such and the prudential norms that the NHB Act may lay down for determining an NPA.

Held:
All appeals were dismissed