ORDER
K.D. Ranjan, A.M.
1. This appeal by the Revenue for asst. yr. 2001-02 arises out of the Order of learned CIT (A)-IX, New Delhi.
The only issue for consideration relates to deleting the addition on account of provisions for doubtful debts of Rs. 32, 43,895. The facts of the case stated in brief are that assessment under Section 143(3) for the year under consideration was made on 17th March, 2004 accepting the returned income filed by the assessee. The AO issued notice under Section 154 to disallow the provision for bad and doubtful debts debited to P&L a/c claimed by the assessee based on RBI guidelines for Non-Banking Financial Company (NBFC). During the course of rectification proceedings under Section 154, it was pleaded by the assessee that the assessee being a Non-Banking Financial Company was bound by NBFC Prudential Norms (Reserve Bank) Directions, 1998 issued by the RBI vide notification dt. 31st Jan., 1998 and accordingly made provision on account of bad and doubtful debts following these guidelines. The AO did not accept this contention of the assessee on the ground that the provision for bad and doubtful debts was not allowable as deduction under IT Act. The provision of bad and doubtful debts was in nature of diminishing in the value of assets and, therefore, could not be said to be a provision to meet a liability. The AO, therefore, rectified the Order passed under Section 143(3) by making the addition of Rs. 32,43,895.
2. On appeal, it was pleaded that assessee, a Non-Banking Financial Company is regulated and bound by Rules and regulations issued by the RBI. The said provision for bad and doubtful debts of Rs. 32,43,895 was made in accordance with NBFC Prudential Norms issued by the RBI which makes it mandatory for all NBFCs to make a provision for bad and doubtful debts. It was also pleaded that provisions of Section 45Q of the RBI Act contain non-obstante clause and have overriding effect on the provisions of IT Act. The assessee placed reliance on the decisions of Tribunal in the case of Overseas Sanmar Financial Ltd. v. Jt. C.I.T. (2004) 87 T.T.J. (Chennai) 556 : (2003) 86 I.T.D. 602 (Chennai) and TEDCO Investment & Financial Services (P) Ltd. v. Dy. C.I.T. (2004) 82 T.T.J. (Del.) 259 : (2003) 87 I.T.D. 298 (Del.), wherein on identical facts the Tribunal allowed the claim of provisions for bad and doubtful debts made by NBFC in accordance with prudential norms issued by RBI. Learned CIT(A) after considering the submissions of the assessee and following the decisions of Tribunal relied upon by the assessee deleted the addition of Rs. 32,43,895.
3. Before us learned Departmental Representative has submitted that after amendment to Section 145 of the Act, hybrid system of accounting cannot be followed by the assessees. The RBI guidelines do not stop accrual of interest under Section 5 of the Act. Circular No. 621 issued by CBDT on 19th Dec, 1991 (1992) 101 C.T.R.(St) 1 gives the legislative intention. Therefore, allowing a provision for bad and doubtful debts is a mistake apparent from record.
4. On the other hand, learned Authorised Representative of the assessee submitted that AO’s power under Section 154 are limited for correcting the mistakes which are apparent from the record. The mistakes should be apparent and should not be arrived at by a long drawn process of reasoning and investigation. The AO can amend the Order but he cannot pass a new Order. He placed reliance on the following decisions:
(1) Hotz Hotels (P) Ltd. v. CIT ;
(2) CIT. v. MMTC Ltd. ;
(3) CIT v. Honda Sell Power Product Ltd. (2006) 206 C.T.R. (Del) 328 : (2007) 158 Taxman 56 (Del).
5. He further submitted that decision of Tribunal Special Bench ‘F’ in the case of New India Industries Ltd. v. Asstt. CIT in I.T.A. No. 3958/Del/2003 dt. 26th Oct., 2007 reported at (2007) 112 T.T.J. (Del)(S.B.) 17-Ed. does not settle the debate. It does not create a binding precedent but can be followed for the purposes of consistency. He further submitted that Explanation inserted below Section 36(l)(vii) does not bring about any change in law. The Explanation brings end to litigation but does not settle the debate of disallowability of deduction under Section 36(1)(vii) that too under Section 154 of the Act. He placed reliance on the decision of Hon’ble Madras High Court in the case of CIT v. India Equipment Leasing Ltd. (2007) 293 I.T.R. 350 (Mad). He further submitted that provisions of Section 45Q of RBI Act make inroads in the provisions of Section 145. The assessee has been following the accounting system regularly wherein provisions for bad and doubtful debts is to be made as per RBI guidelines. Therefore, deduction on account of provisions of bad and doubtful debts has to be allowed as per accounting system followed by the assessee.
6. Replying to the submissions made by learned Authorised Representative of the assessee, the learned Departmental Representative submitted that Explanation inserted in the statute w.e.f. 1st April, 1989 settles the issue that provision for bad and doubtful debts could not be allowed as deduction. The Special Bench has decided the issue in favour of Revenue. Therefore, in view of the decision of the Special Bench and amendment brought into statute, there is no debate about the allowability of provision for bad and doubtful debts. He also submitted that learned CIT(A) has misinterpreted the law by relying on the decision of Tribunal in the case of Overseas Sanmar Financial Services Ltd. (supra) and TEDCO Investment & Financial Services Ltd. (supra). Withdrawing the claim under Section 154 has rectified the mistake committed by the AO in the original assessment. Thus the Order passed under Section 154 rectifying the mistake apparent from record by AO is not a review of the Order made under Section 143(3). The mistake with reference to interpretation of law can also be rectified under Section 154 of the Act.
7. We have heard both the parties and perused the material on record. In the case before us, the assessee made a provision for bad and doubtful debts following the RBI guidelines. Finance Act, 2001 inserted Explanation to Section 36(1)(vii) with retrospective effect from 1st April, 1989. The Explanation reads as under:
Explanation–For the purposes of this clause, any bad debt or part thereof written of as irrecoverable in the accounts of assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.
9. Thus the insertion of the Explanation to Section 36(1)(vii) clarifies two issues i.e. firstly the mandatory nature of the provisions as is seen from words “shall not include” and secondly the application of the Explanation with retrospective effect from 1st April, 1989. Hon’ble Supreme Court in the case of Commr. of Agrl. IT v. Plantation Corporation of Kerala Ltd. (2000) 164 C.T.R. (SC) 502 while explaining purpose of insertion of the Explanation held as under:
So long as there is no ambiguity in the statutory language resort to any interpretative process to unfold the legislative intent becomes impermissible. An Explanation is intended to either explain the meaning of certain phases and expressions contained in a statutory provision or depending upon its language it might supply or take away something from the content of a provision and at times even, by way of abundant caution, to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative process to make the position beyond controversy or doubt.
Hon’ble Delhi High Court in the case of CIT v. Orissa Cement Ltd. while explaining the scope of an “Explanation” to a statutory provision observed as under:
The object of an Explanation to a statutory provision is: (a) to explain the meaning and intendment of the Act itself; (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve; (c) to provide an additional support to the dominant object of the Act in Order to make it meaningful and purposeful; (d) An Explanation cannot in anyway interfere with or change the enactment or any part thereof; but where some gap is left which is relevant for the purpose, the Explanation, in Order to suppress the mischiei and advance the object of the Act, can help or assist the Court in interpreting the true purpose and intendment of the enactment, and the right with which any person under a statute has been clothed. It cannot set at naught the working of an Act by becoming a hindrance in the interpretation of the same.
Hon’ble Kerla High Court also in the case of CIT v. Kerala Electric Lamp Works Ltd. held as under:
Whenever the legislature wanted to convey its intention to give retrospective effect to a provision either by enforcing its commencement from an earlier date by specific provision as regards its commencement or by using language or expression conveying such meaning it has always done so clearly.
The label Explanation is not decisive of the true meaning and scope of the provision ordinarily the purpose of Explanation in a statute is to clarify or explain or settle any doubt or ambiguity or controversy. It may even widen the scope of the main provision in rare cases. The words used alone can reflect the true intend and they should be construed on their own terms.
In view of above interpretation of Explanation, Expln. 5 to Section 32 added with prospective effect by the Fimince Act, 2001 w.e.f. 1st April, 2002 was held to be operative prospectively.
9. From the decisions of Hon’ble Courts referred to above, it is clear that the purpose of insertion of the Explanation is to explain the statutory provisions. The plain reading of the Explanation to Section 36(1)(vii) shows that the legislative intention is to allow deduction in respect of bad debts actually written off in the books of accounts and deny the benefit of Section 36(1)(vii) of the Act in respect of provision made for “bad and doubtful debts”. It makes the position of law beyond controversy or doubt. Thus the provision for bad and doubtful debts made in the account of the assessee cannot be allowed as deduction under Section 36(1)(vii) of the Act. It is not the case of assessee that the assessee has squared up the accounts of various parties by crediting their account by the amounts written off. Unless the amount is written off in the accounts of various parties, the provisions made in the books of accounts cannot be allowed as deduction under Section 36(1)(vii) of the Act which is clear from the language of Explanation to Section 36(1)(vii) of the Act. Therefore, there is no debate about the allowability of provisions for bad and doubtful debts. Hence, the AO was justified in disallowing the claim under Section 154 of the Act.
10. The contention of the learned Authorised Representative of the assessee that the decision of Tribunal Special Bench ‘F’ in the case of M/s New India Industries Ltd. (supra) does not settle the debate and does not create a binding precedent, does not hold water. Hon’ble Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corporation Ltd. v Jt. C.I.T. has held that that RBI guidelines cannot override the statutory provisions of IT Act, 1961. As on the date no contrary decision of any other High Court was cited by learned Authorised Representative of the assessce. Therefore no controversy existed when the AO sought to rectify the Order under Section 154 of the Act. Another contention of learned Authorised Representative of the assessee that RBI guidelines make inroads into the provisions of Section 145 of the Act is also devoid of any merits. If the contention of the learned Authorised Representative of the assessee is accepted, it would amount to allowing the assessee to follow hybrid system of accounting which is not permissible in view of provisions of Section 145 w.e.f. 1st April, 1997. From this date assessee can either follow mercantile system of accounting or cash system. Hybrid system of accounting is not permitted. Wherever the legislature has desired to relax the provisions of law, it has expressly done so. One such example is in respect of banks, financial institutions and public companies engaged in infrastructure development which have been permitted under Section 43D of the Act to recognize the income in respect of sticky loans on receipt basis. NBFCs have not been granted this concession of recognition of their income in respect of sticky loans. Therefore, we are unable to agree with the contention of learned Authorised Representative of the assessee.
11. Learned CIT(A) has allowed the claim of the assessee without considering the Explanation inserted by Finance Act, 2001 with retrospective effect from 1st April, 1989. Accordingly, in our considered view, learned CIT(A) was not justified in allowing the claim of the assessee by creating a debate that the RBI guidelines will override the provisions of IT Act. The issue involved in this case is about allowability of provisions for “bad and doubtful debts”. The legal position is clear that if the amount of bad debt has been written off in the accounts of various persons, the same will be allowable as deduction. In case where the amount has been claimed as provision for bad and doubtful debts is not written off in the accounts of various persons, the same will not be allowable as deduction in view of the Explanation to Section 36(1)(vii) of the Act. We accordingly set aside the Order of learned CIT(A) and restore the Order of AO.
In the result, the appeal filed by the Revenue stands.