ART LEASING LTD. Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) THE question raised is whether the Income -tax Appellate Tribunal was justified in confirming the disallowance of provision for bad and doubtful debts claimed by the appellant -assessee for the assessment years 1997 -98 to 2000 -01. We have heard Sri T.M. Sreedharan, learned Counsel appearing for the appellant.

(2.) THE appellant -assessee is a Non -Banking Financial Company (NBFC) registered with Reserve Bank of India. As a measure of control, the RBI has issued guidelines to NBFCs to create provision for bad and doubtful debts. According to the assessee, the assessee created the provisions for bad and doubtful debts in terms of the guidelines issued by the RBI in exercise of the powers conferred on the Bank under Section 45JA of the Reserve Bank of India Act, 1934 (for short 'the RBI Act'). However, in the course of assessment, the Assessing Officer noticed that the appellant/assessee has claimed deduction of the entire provision created for bad and doubtful debts in the computation of taxable income. Since the Explanation contained in Section 36(1)(vii) of the Income -tax Act prohibits deduction of any provision for bad and doubtful debts in the computation of taxable income, the Assessing Officer disallowed the claim. When the appellant filed appeals before the Commissioner of Income -tax (Appeals), following certain decisions of the Income -tax Appellate Tribunal, the CIT (Appeals) remanded the matter to the Assessing Officer directing to allow the claim of the appellant if the provisions for bad and doubtful debts were created in accordance with the RBI guidelines. The Department challenged these orders in appeals before the Income -tax Appellate Tribunal, which, allowed the appeals, following the decision of the Special Bench of Income -tax Appellate Tribunal, Delhi Bench and the decision of the Income -tax Appellate Tribunal, Chennai Bench, by reversing the order of the Commissioner of Income -tax (Appeals) and restoring the disallowance against which these appeals are filed. The appellant -assessee contended that by virtue of Section 45Q of the RBI Act, the guidelines issued by the RBI have overriding effect over the provisions of the Income -tax Act and so much so, the claim was rightly directed to be allowed by the CIT (Appeals). The further contention raised by the assessee is that by virtue of Sub -section (2) of Section 145 of the Income -tax Act, the RBI guidelines should be treated as equivalent to standards of accounting prescribed by the Government and so much so, the appellant is entitled to deduction claimed. Since the appellant's claim is that the guidelines issued by the RBI have overriding effect over the provisions contained in the Income -tax Act, we extract hereunder Section 45Q of the RBI Act and Section 36(1)(vii) of the Income -tax Act, 1961. Section 45Q of the RBI Act reads as follows: Chapter III -B to override other laws. - -The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the lime being in force or any instrument having effect by virtue of any such law. Section 36(1)(vii) of the Income -tax Act reads as follows: