Share accepted as consideration interest is deemed to have accrued and allowable and guidelines RBI cannot be override by provision of IT on leas rent due from NPA

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA

[Before Shri Mahavir Singh, JM & Shri C. D. Rao, AM]

I.T.A No. 85/Kol/2007

Assessment Year: 2003-04

All Bank Finance Ltd.

(Appellant)

Vs.

Deputy Commissioner of Income-tax

Circle-6, Kolkata.

 (Respondent)

Date of hearing: 02.04.2012

Date of pronouncement: 29.06.2012

For the Appellant: S/Shri B. K. Ghosh & Pijush Dey

For the Respondent: Shri Niraj Kumar

ORDER

Per Mahavir Singh, JM

This appeal by assessee is arising out of order of CIT(A)-VI, Kolkata in Appeal No. 25/ CIT(A)-VI/06-07 dated 30.10.2006. Assessment was framed by DCIT, Circle-6, Kolkata u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2003-04 vide his order dated 22.03.2006.

2. The first issue in this appeal of assessee is against the order of CIT(A) confirming the addition of notional interest of Rs.7.18 cr. due from M/s. V. B. Desai & Co. For this, assessee has raised following ground no. 1 and 1.1:

“1. That the Ld. CIT(A) was unjustified in confirming the addition of Notional Interest of Rs.7.18 Crore allegedly due from M/s. V. B. Desai & Co. without any cogent reasons. 1.1. That the Ld. CIT(A) failed to appreciate that after the judgment of the Special Court dated 01.11.2002, the question of any Notional Interest due from M/s. V. B. Desai & Co. on unpaid consideration from M/s. V. B. Desai & Co. does not arise inasmuch as according to the judgment of the Special Court, there was no unpaid consideration due from M/s. V. B. Desai & Co. after May, 1992.”

3. We have heard rival submissions and gone through facts and circumstances of the case. Brief facts leading to the above issue are that the disputed amount relates to Harshad Mehta scam related transactions as the assessee has purchased 60000 shares of ACC Ltd. @ Rs.10,000/- per share and IRFC Bonds of face value of Rs. 42 cr. From M/s. V. B. Desai & Co. on 09.04.1992. The assesee has made a forward sale of ordinary shares of ACC Ltd. @ 10,289/- per share and IRFC Bonds face value of Rs.42 cr. on 29.04.1992. The AO relying on the decision of CIT(A) for AY 1993-94 made addition of notional interest at Rs.7.18 cr. By giving following findings:

“The submissions were carefully considered. It is noted that the assessee while filing its return of income had not offered the amount of Rs.7.18 crore for taxation. What is extremely pertinent is that Assessee Company follows mercantile system of accounting. There is no dispute that All Bank Finance had a right to receive interest @ 24% on the outstanding balance from M/s. V. B. Desai & Co. Accordingly it whould have included this interest in its return of income. The ratio of Hon’ble Apex Court in the case of Babulal Narottam Das Vs. CIT (187 ITR 473) is also applicable in the instant case. Since the assessee appeal is pending before hon’ble ITAT, to keep the issue alive an addition of Rs.7.18 crore is made to the total income of the assessee. It may be

mentioned that the addition on this issue has been confirmed by Ld. CIT(A) for Asst. Yr. 2002-03 vide order dated 13.03.06.”

The CIT(A) also confirmed the action of AO exactly on same reasoning as done by CIT(A) in AY 1993-94. Aggrieved, now assessee is in appeal before us.

4. We find that M/s. V. B. Desai & Co. was to pay consideration on forward contracts entered into on 29.04.1992 by 25.05.1992. Simultaneously on 13.05.1992 and on 21.05.1992 M/s. V. B. Desai & Co. pledged shares with assesee as a security for the consideration due from it. The assessee made it clear to M/s. V. B. Desai & Co. that in case it fails to pay consideration by 25.05.1992, it is free to sell the pledged shares and in case there is still short fall of unpaid consideration it would pay interest @ 24% on short fall. The assessee did not sell the pledged shares and also did not pay to M/s. V. B.Desai & Co. by 25.05.1992. It also withdrew the offer of payment of interest to M/s. V. B. Desai & Co. vide its letter dated 07.06.1993 on the ground that if the pledged shares have been sold by 25.05.1992, the sale proceeds would have exceeded the consideration due from it. The assessee filed a recovery suit claiming interest before Hon’ble Bombay High Court. M/s. V. B. Desai & Co. also filed a counter suit before Bombay High Court. Hon’ble Bombay High Court transferred assessee’s suit and M/s. V. B. Desai & Co.’s counter suit to Special Judge, who was adjudicating scam case. Hon’ble Judge of Special Court delivered its judgment on 01.11.2002 whereby it has decided that the shares pledged by M/s. V. B. Desai would become the property of ABFL w.e.f. the date the shares were pledged in lieu of the considertion due from M/s. V. B. Desai. In other words, by the Order of the Special Court, there was no unpaid consideration due from M/s. V. B. Desai after 13.05.1992. Therefore, if there is no unpaid consideration due from M/s. V. B. Desai after 13.05.1992, the question of any interest @ 24% from M/s. V. B. Desai after 13.05.1992 does not survive. The Tribunal in AY 1993-94 in ITA No. 679/K/2005 has considered and allowed the claim of assessee vide order dated 29.02.2008 vide para 10.6, 10.7 and 11 as under:

“10.6. We have examined the rival submissions. We find that the contention of the departmental representative has no merit and cannot be accepted. The Special Court adjudicated the respective rights of the parties involved in the transactions. It decided on the nature of such transactions after thorough examination of oral and documentary evidence. The assessment relating to such transactions cannot be made dehors such adjudication. Irrespective of the date of adjudication, which will always be much after the dates of such transactions or events, such adjudication has its efficacy since the very inception. The adjudication does not create any new relationship but only decides what was all along there.

10.7. We further find that the addition of Rs.9.02 crores on account of alleged accrued interest on alleged dues of VBD cannot stand in view of the finding of the Special Court that the said shares of other companies and bonds were given by VBD in May 1992 in full and final settlement of the assessee’s dues. The addition of Rs.9.02 crores is directed to be deleted. Ground no. 2 in the assessee’s appeal is allowed.

11. We further find that the CIT(A)’s order deleting addition of Rs.6.9 crores involved in ground no. 1 in the departmental appeal has to be upheld in view of the finding of the Special Court as to the nature of the transaction being ready forward contract and in essence it being a financing transaction. As held by the Special Court the said transaction was a ready forward transaction coupled with an obligation to repurchase the very same shares at price higher than that contracted for to cover the interest element. There is no extra commercial consideration involved in the transaction. The assessee made a profit of Rs.289.75 per share for its investment of 45 days only. Accordingly ground No.1 in the departmental appeal is dismissed.”

5. Similarly, for AY 2002-03, Tribunal following its own decision for AY 1993-94 allowed the claim of the assessee vide para 3.1 as under:

“3.1. Keeping in view of the fact that the facts involved in the present assessment year are similar to that of the one decided by the Tribunal in assessee’s own case in ITA No.679/Kol/05 for the assessment year 1993-94, we find no infirmity in the orders of the Ld. CIT(A), which are in conformity with the orders of this Tribunal. Therefore, we allow the ground taken by the assessee.”

We find that the issue related to Harshad Mehta Scam i.e. the fake sale of shares or pledging of shares was the subject matter before Tribunal in AY 1993-94 and thereafter 2002-03 and even the Special Judge of Harshad Mehta scam at Bombay has decided the issue that once M/s. V. B. Desai & Co. accepted the position and accepted the shares as consideration, the interest deemed to have accrued and it is allowable. Respectfully following the Tribunal’s decision and taking a consistent view, we delete the addition and this issue of assessee’s appeal is decided in its favour.

6. The next issue in this appeal of assessee is against the order of CIT(A) confirming the addition of lease rentals due on Non-performing Assets (NPA). For this, assessee has raised following ground no.2:

“That the Ld. CIT(A) was unjustified in confirming the addition of Rs.80,08,312/- on account of lease rentals due from non-performing assets without properly appreciating the submissions made by the appellant.”

7. We have heard rival submissions and gone through facts and circumstances case. Brief facts leading to the above issue are that the AO made addition of lease rentals at Rs.80,08,312/- by holding that such lease rentals was not credited in the accounts of the assessee as the parties have become NPA. The assessee explained before the lower authorities that assessee being NBFC, is bound to follow the guidelines issued by RBI and according to guidelines of RBI if party becomes a defaulter for twelve months, but the lower authorities has not accepted the contention of the assessee and made addition of lease rentals by deeming the same as accrued income. Aggrieved now, assessee is in appeal before us.

8. We find that it is a fact that assessee has not booked the lease rentals as noted by the AO but on the reason that the assessee being NBFC is following the guidelines issued by RBI and guidelines states that once the party has become a defaulter for at least twelve months that party can be declared as NPA and no income on that part can be booked from the source after failure to get any income. In the present case all parties have become NPAs and, therefore, the assessee has not booked the lease rentals due from them. As argued by Ld. CIT, DR that this issue is squarely covered by the decision of ITAT, Delhi Special Bench in the case of New India Industries Ltd VS. ACIT (2007) 18 SOT 51 (Del.SB) where the issue whether provision made by NBFC in respect of NPAs in its P & L Account in accordance with prudential norms issued by RBI in exercise of powers conferred upon it u/s. 45JA of RBI Act, 1934 be classified as bad debts and be allowed as deduction u/s. 36(1)(vii) of the Act. We find that Special Bench of this Tribunal in the case of New India Industries Ltd. has held the issue against the assessee and in favour of revenue whereint it has held that the norms issued by RBI cannot override the provisions of the Income Tax Act and particularly regarding NPAs or bad debts. Once this is the position that Special Bench has taken a view, we respectfully following the same decide this issue against the assessee and in favour of revenue. This issue of assessee’s Appeal is dismissed.

9. In the result, appeal of assessee is allowed in part.

10. Order pronounced in the open court on 29.06.2012

                                                         Sd/-                         Sd/-

                                                  (C. D. Rao)           (Mahavir Singh)

                                         Accountant Member      Judicial Member

Dated: 29th June, 2012

Jd.(Sr.P.S.)

Copy of the order forwarded to:

1. APPELLANT – All Bank Finance Ltd., 15, India Exchange Place, 4th floor, Kolkata-700 001.

2. Respondent – DCIT, Circle-6, Kolkata.

3. The CIT(A), Kolkata

4. CIT Kolkata

5. DR, Kolkata Benches, Kolkata

True Copy,

By order,

Asstt. Registrar.