{"id":173089,"date":"2006-05-11T00:00:00","date_gmt":"2006-05-10T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/salim-akbarali-nanji-vs-union-of-india-ors-on-11-may-2006"},"modified":"2018-04-03T12:35:34","modified_gmt":"2018-04-03T07:05:34","slug":"salim-akbarali-nanji-vs-union-of-india-ors-on-11-may-2006","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/salim-akbarali-nanji-vs-union-of-india-ors-on-11-may-2006","title":{"rendered":"Salim Akbarali Nanji vs Union Of India & Ors on 11 May, 2006"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Salim Akbarali Nanji vs Union Of India & Ors on 11 May, 2006<\/div>\n
Author: B Singh<\/div>\n
Bench: B. P. Singh, Altamas Kabir<\/div>\n
           CASE NO.:\nAppeal (civil)  6715 of 2004\n\nPETITIONER:\nSalim Akbarali Nanji\n\nRESPONDENT:\nUnion of India & Ors.\n\nDATE OF JUDGMENT: 11\/05\/2006\n\nBENCH:\nB. P. SINGH & ALTAMAS KABIR\n\nJUDGMENT:\n<\/pre>\n
J U D G M E N T <\/p>\n
B.P. SINGH, J.\n<\/p>\n
\tThis appeal by special leave has been preferred against the judgment
\nand order of the High Court of Judicature at Bombay dated September 18,
\n2003 in Writ Petition No.2199 of 2003.  The High Court by its impugned
\njudgment and order dismissed the writ petition preferred by the appellant
\nholding that the issues raised by the appellant in the writ petition were not
\njusticiable in writ jurisdiction.\n<\/p>\n
\tThe appellant has appeared before us in person and argued his appeal.
\nHe claims to be a shareholder of the Development Credit Bank Ltd.
\nRespondent No.6 herein.  In sum and substance, the grievance of the
\nappellant in the writ petition was that the Reserve Bank of India being the
\nstatutory and regulatory authority, illegally approved the proposal of the
\nRespondent No.6 Development Credit Bank Ltd. for writing off of debts,
\namounting to Rs.120 crores, of the Bank without following the proper
\nprocedures prescribed under the provisions of Sections 13 and 14 of the
\nSecuritisation Act, 2002 and Sections 19 and 31A of the Recovery of Debts
\nDue to Banks Act, 1993.\n<\/p>\n
\tTo appreciate the grievance of the appellant it is necessary to notice
\nthe background in which the controversy arises.\n<\/p>\n
\tOn February 19, 2003, Respondent No.6 Bank made a request to the
\nReserve Bank of India to grant permission and allow the Bank to write off
\nfrom its financial records, debts that had turned non-performing assets over
\nthe years amounting to Rs.120 crores.  It was stated in the letter of request,
\nthat to institute better balance sheet management and a tighter control
\nenvironment, the Board of Directors and the principal shareholders of the
\nBank in France had approved the bank’s strategy to write off these debts,
\nsubject to approval of the Reserve Bank of India.  The Bank had taken
\nnecessary steps to recover the dues and will continue to take follow up
\naction, but there appeared no prospect of early recoveries from some of these
\naccounts.   The Bank did not expect to generate enough profits to absorb the
\nwrite off and, therefore, sought permission to allow the write off from the
\namount lying as General Reserve in the books of the bank as on March 31,
\n2003, and not from the operating income for the year.  It was assured that the
\nBank was estimated to show capital adequacy well above the minimum
\nlimits as prescribed by the Reserve Bank of India even after the amount is
\ntransferred for write off.  The Bank brought to the notice of the Reserve
\nBank of India that it had inducted fresh equity capital of Rs.21 crores. The
\nBank was also actively considering raising subordinated debt amounting to
\nRs.75 crores to further augment its capital base during the year.  It also
\nreferred to various other steps being taken to increase its capital base.  The
\nletter also refers to the recommendations of M\/s. Mekinsey & Co. and the
\ndecision of the Board of the Bank to act on its recommendations.  In the
\nabove background, the Bank sought approval of the Reserve Bank of India
\nto write off an amount of Rs.120 crores from its General Reserve,
\nconsequent upon writing off debts to the tune of Rs.120 crores.\n<\/p>\n
\tThe Reserve Bank of India by its communication of March 3, 2003
\nresponded to the request of the Respondent No.6 Bank and advised the Bank
\nthat it may utilize Rs.120 crores from the “Revenue & Other Reserves” to
\nwrite off the debts that have turned NPAs.  The drawal should be “below the
\nline” after arriving at the net profit\/loss for the year ended March 31, 2003
\non the basis of accepted accounting policies duly approved by the banks
\nAuditors.  The above adjustment should be prominently disclosed in the
\nNotes to Accounts.\n<\/p>\n
\tAfter grant of approval by the Reserve Bank of India, the Annual
\nGeneral Meeting of the Company was held on September 30, 2003 and the
\nwrite off of the bad debts was approved by the shareholders of the
\nRespondent No.6 Bank.\n<\/p>\n
\tIn the counter affidavit filed on behalf of the Reserve Bank of India
\nbefore this Court, it has been stated that the Board of Directors of the
\nRespondent No.6 Bank and its principal shareholders approved the proposal
\nto write off these debts by appropriating the reserves subject to receiving
\napproval from the Reserve Bank of India.  Referring to Section 17(1) of the
\nBanking Regulation Act, 1949, it was explained that every banking company
\nincorporated in India must create the reserve fund and shall out of the
\nbalance of profit of each year as disclosed in the profit and loss account
\nprepared under Section 29 of the Act, and before any dividend is declared,
\ntransfer to the reserve fund a sum equivalent to not less than 20% of such
\nprofit.  The said limit was raised to 25% in December 1974.  In terms of
\nSection 17(2), a banking company can appropriate sums from the reserve
\nfund or the share premium account, and the same must be reported to the
\nReserve Bank of India within 21 days explaining the circumstances relating
\nto such appropriation.  This implies that appropriation of the statutory
\nreserve fund does not require the Reserve Bank’s prior approval though
\nthere is a statutory obligation on banks to report appropriation to the Reserve
\nBank of India.  The appropriation of other reserves does not cast any
\nobligation on banking companies to report to the Reserve Bank.  However,
\nas a matter of practice, the banking companies are approaching the Reserve
\nBank for permission before appropriating their reserves for writing off the
\nbad debts.  The Reserve Bank considers the financial position of the
\napplicant banking company before granting permission to utilize the reserves
\nfor the purpose.\n<\/p>\n
\tDealing with the facts of this case, it was averred that the Respondent
\nNo.6 Bank had earned a net profit of Rs.34.05 crores during the financial
\nyear 2001- 02 and transferred Rs.8.55 crores to statutory reserve and Rs.0.30
\ncrore to investment fluctuation reserve.  The gross and net NPAs of
\nRespondent No.6 Bank were Rs.215.45 crores and Rs.149.33 crores
\nrespectively as on March 31, 2002.  The Capital to Risk-weighted Assets
\nRatio (CRAR) was at 11.49% as on March 31, 2002.  Even after the amount
\nwas transferred from the reserves for write off as on March 31,2003, the
\nCRAR stood at 10.08%. which was above the minimum prescribed CRAR
\nof 9%.  During the year 2002-03, an amount of Rs.21 crores has been
\ninduced as fresh equity capital by the principal shareholders of the banking
\ncompany.  After taking into consideration the above facts and the need for
\ncleansing the balance sheet of the Respondent No.6 Bank, the Reserve Bank
\nhas allowed it to utilize Rs.120 crores from the revenue and other reserves to
\nwrite off debts that have turned NPAs, vide letter DBOD.
\nNo.PSBS.1036\/16.01. 132\/2002-03 dated March 3, 2003.\n<\/p>\n
It was further explained that the write off is an internal accounting
\nprocedure to clean up the balance sheet of the Bank.  Such write off is
\nresorted to even in cases where the Bank has not exhausted all the avenues
\nfor recovery of dues.  Such write off does not affect the right of the Bank to
\nproceed against the borrowers to collect the dues.  The legal proceedings
\ninitiated by the Bank to recover the loans or to enforce the security against
\nthe borrowers may continue.  The write off does not bar the Bank from
\nfollowing up recoveries.  Further recoveries, if any, in these accounts are
\ncredited to the income account, in turn improving the net worth of the Bank.
\nReplying to the Petitioner’s allegation that the Reserve Bank had failed to
\nexercise its statutory powers and authority of law against the Bank under the
\nvarious provisions of the Banking Regulation Act, 1949 to restrain it from
\ntaking any steps or acting in furtherance to write off the secured debts of the
\nsum of Rs.120 crores, which is detrimental to the interests of the Bank, its
\ndepositors, investors and shares holders, it was submitted that the banking
\ncompanies do not need Reserve Bank’s permission to write off bad debts.
\nAs mentioned earlier, the banking companies are also not under statutory
\nobligation to seek the Bank’s approval for appropriation of sums from their
\nreserves.  However, as a matter or practice, the banking companies do
\napproach the Reserve Bank for permission, before utilizing their reserves,
\nfor writing off the bad debts and the Reserve Bank grants approval, if it is in
\norder, on considering their financial position and other related factors as
\nstated above.\n<\/p>\n
In its counter affidavit filed before this Court the Respondent No.6
\nBank stated that the dues from various debtors had necessarily to be shown
\nas non-performing assets (NPAs) as per the guidelines issued by the Reserve
\nBank of India.  The Reserve Bank of India monitors the NPAs strictly and
\nduring the periodical inspections, goes into the matter of NPAs in detail.
\nThe Reserve Bank of India had issued a circular letter dated July 28, 1995,
\nand has been issuing circulars\/ directions\/ guidelines from time to time
\nprescribing the manner in which NPAs could be categorized and where and
\nhow amounts should be written off.  Compliance of these guidelines is
\nrigorously monitored by the Reserve Bank of India at the time of periodic
\ninspections.  The last such detailed periodic inspection by the Reserve Bank
\nof India in the case of Respondent No.6 Bank was conducted sometime in
\nSeptember, 2003 when all these and other matters were gone into by the
\nReserve Bank of India.\n<\/p>\n
It is further stated that Respondent No.6 Bank was negotiating with
\nseveral reputed foreign investors, including International Financial
\nCorporation, Washington (IFC), for a major infusion of capital into Bank.
\nThe foreign investors including IFC, Washington indicated to the
\nRespondent No.6 Bank that they would very much like to see the Bank’s
\nbalance sheet cleaned up by writing off the NPAs and especially so because
\nthe Respondent No.6 Bank had accumulated huge reserves which had been
\nbuilt up out of the profits earned by the Bank since 1995.  The write off of
\nthe amounts of NPAs against the reserves of the Bank was therefore a book
\nentry with the object of cleaning up the balance sheet and without any
\nprejudice to the Bank’s right to continue with the proceedings to recover the
\namounts from the debtors in question.\n<\/p>\n
It was reiterated that the mere write off of a debt by the Bank did not
\nrequire the prior permission or subsequent approval of the RBI. However, if
\nbad debt is to be written off against the reserves, it is necessary for the Bank
\nto intimate the RBI.  The normal practice being, however, to apply to RBI
\nfor approval, the Respondent No.6 Bank had approached the RBI by its
\nletter dated February 19, 2003.  Thereafter, the Reserve Bank of India, by its
\nletter dated March 3, 2003 granted approval for the write off of the bad debts
\nagainst the reserves of the Bank.  It is also important to note that the audited
\nprofit and loss account and the balance sheet of the Bank were approved at
\nthe Annual General Meeting held on September 30, 2003 by an
\noverwhelming majority of the shareholders, by show of hands and the
\nappellant was present in the said meeting.  It was, therefore, submitted that
\nthe write off of the bad debts has also the approval of the shareholders of the
\nBank, and the same gives a true and fair view of financial position of the
\nBank.  Such write off is also pre-eminently in the interest of the Bank and all
\nits shareholders.\n<\/p>\n
The Bank has, further, explained that almost 80% of the NPAs\/ bad
\ndebts relate to the loans advanced to 15 parties. The particulars about these
\n15 parties and the steps taken by the Bank to recover the amounts due, have
\nbeen set out in the counter affidavit which was filed in compliance of the
\norder of this Court dated July 5, 2004.\n<\/p>\n
It will thus appear from the facts noticed above that the writing off of
\nNPAs is an exercise undertaken to clean the balance sheet, and is an internal
\naccounting procedure.  It does not require the permission of the Reserve
\nBank of India but as explained by the Reserve Bank of India, banks usually
\nmake such a request as a matter of practice and permissions are granted by
\nthe Reserve Bank after considering all relevant aspects of the matter.  In the
\ncase where a banking company appropriates sums from the reserve fund or
\nthe share premium account, it is required to report to the Reserve Bank of
\nIndia within 21 days explaining the circumstances relating to such
\nappropriation.\n<\/p>\n
In the instant case also since the Respondent No.6 Bank proposes to
\nappropriate the sums from their reserves, it sought by way of abundant
\ncaution the approval of the Reserve Bank of India.  There is, therefore, no
\njustification for the grievance that in granting approval to the bank to write
\noff its non-performing assests to the tune of Rs.120 crores, the Reserve Bank
\nof India committed breach of any statutory provision or acted illegally or
\narbitrarily in the matter.  There is not even an allegation that the Reserve
\nBank of India acted on extraneous consideration, or that its action was mala-
\nfide.\n<\/p>\n
The appellant submitted before us that writing off of Rs.120 crores
\nwould cause a great loss to the Bank, because the sum of Rs.120 cores
\nwould be lost to the bank.  He submitted that it is not as if the loans cannot
\nbe recovered.  In most cases, securities are provided before loans are
\nadvanced.  There are guarantors against whom the Bank can proceed.  In
\nthese circumstances, there was no justification for the Bank to write off these
\ndebts.\n<\/p>\n
The submission proceeds on the assumption that the bad debts written
\noff cannot be recovered.  In fact and in law it is not so. Despite writing off
\nthe debt is still recoverable by the Bank.  The affidavit filed by the Bank also
\ndiscloses the steps which are being taken to realize the dues from the debtor.
\nSome amounts have been recovered over the years though the figure does
\nnot appear very impressive.  Even so, steps are being taken to recover the
\ndues whenever possible and Respondent No.6 Bank has furnished particulars
\nof the various proceedings pending for recovery of such debts.  The write off
\nis only an internal accounting procedure to clean up the balance sheet, and it
\ndoes not affect the right of the creditor to proceed against the borrower to
\nrealize his dues.  Moreover, it does give some benefit to the Bank under the
\nIncome Tax Laws because after write off tax is payable only on the amount
\nrecovered as and when recovery is made.   In the guidelines issued by the
\nReserve Bank of India, it is observed :\n<\/p>\n
“Writing off of NPAs  In terms of section 43D of the
\nIncome- tax Act, 1961, income by way of interest in
\nrelation to such categories of bad and doubtful debts as
\nmay be prescribed having regard to the guidelines issued
\nby the RBI in relation to such debts, shall be chargeable
\nto tax in the previous year in which it is credited to the
\nbank’s profit and loss account or received, whichever is
\nearlier.\n<\/p>\n
This stipulation is not applicable to provisioning required
\nto be made as indicated above.  In other words, amounts
\nset aside for making provision for NPAs as above are not
\neligible for tax deductions.\n<\/p>\n
Therefore, the banks should either make full provision as
\nper the guidelines or write-off such advances and claim
\nsuch tax benefits as are applicable, by evolving
\nappropriate methodology in consultation with their
\nauditors\/ tax consultants.  Recoveries made in such
\naccounts should be offered for tax purposes as per the
\nrules”.\n<\/p>\n
The appellant submitted before us that the Reserve Bank of India had
\nfailed to exercise the statutory powers vested in it and therefore, it failed to
\nperform a legal duty cast upon it by law.  The appellant was, therefore,
\nentitled to invoke the writ jurisdiction of the High Court for issuance of Writ
\nof Mandamus to the Reserve Bank of India to act in accordance with its
\nstatutory obligations.  In this connection, reference has been made to
\nSections 21, 22(4), 27, 30, 35, 35A, 36, 36AA, and 45 of the Banking
\nRegulation Act, 1949.\n<\/p>\n
Section 21 of the Banking Regulation Act empowers the Reserve
\nBank to determine the policy in relation to advances to be followed by
\nbanking companies generally, or by any banking company in particular.  The
\npolicy, if so, determined by the Reserve Bank of India in public interest or in
\nthe interest of depositors or banking policy, must be followed by all banking
\ncompanies.  In the instant case there is no material whatsoever to
\ndemonstrate that the Reserve Bank of India has failed to exercise its powers
\nunder Section 21 of the aforesaid Act, nor is there anything to prove that the
\nRespondent No.6 Bank herein has not followed any policy so determined by
\nthe Reserve Bank of India.\n<\/p>\n
Section 22 (4) of the aforesaid Act empowers the Reserve Bank of
\nIndia to cancel a licence granted to a banking company in the circumstances
\nmentioned therein.  We fail to understand how the said provision is at all
\nrelevant since it is not the case of the appellant that the licence granted to the
\nRespondent No.6 Bank should be cancelled.\n<\/p>\n
Section 27 casts an obligation on every banking company to submit to
\nthe Reserve Bank a return in the prescribed form and manner showing its
\nassets and liabilities in accordance with the aforesaid provision.  The
\nReserve Bank is also authorized at any time to direct a banking company to
\nfurnish it such statements and information relating to the business or affairs
\nof the banking company as it may consider necessary or expedient to obtain
\nfor the purposes of the Act.  We fail to understand how Section 27 is at all
\nrelevant in the instant case because it is not the case of the appellant, nor has
\nany material being placed on record to show, that there has been breach of
\nSection 27 of the aforesaid Act.\n<\/p>\n
Similarly, Section 30 which deals with audit of the balance sheet and
\nprofit and loss account of a banking company by a qualified auditor is not at
\nall relevant.  SubSection (1B) of Section 30 empowers the Reserve Bank to
\norder a special audit.  In the instant case we are not concerned at all with the
\nappointment of auditors.\n<\/p>\n
Section 35 relates to inspection of banking companies.  It empowers
\nthe Reserve Bank to cause an inspection to be made by one or more of its
\nofficers of any banking company and its books and accounts.\n<\/p>\n
Section 36 enumerates the other powers and functions of the Reserve
\nBank.  Similarly Section 36AA empowers the Reserve Bank to remove from
\noffice any Chairman, Director, Chief Executive Officer or other officer or
\nemployee of the banking company, subject to the conditions laid down in
\nthat provision.\n<\/p>\n
Section 45 confers power on the Reserve Bank to apply to the Central
\nGovernment for suspension of business by a banking company and to
\nprepare scheme of reconstitution or amalgamation.  We fail to appreciate
\nhow any of these provisions is relevant to the issue that arises in the instant
\nappeal.  No doubt, the Reserve Bank has been vested with wide powers to
\ncontrol and regulate the functioning of banks.  If need be, those powers may
\nbe exercised by the Reserve Bank.  In the instant case, we are only
\nconcerned with the writing off of non-performing assets.  Nothing has been
\nproduced on record to satisfy us that the Reserve Bank has acted in breach of
\nits legal obligations in the matter of granting permission to the Respondent
\nNo.6 Bank to write off the debts that have become non-performing assets.\n<\/p>\n
The appellant made a general submission that there was no
\njustification for writing off the bad debts amounting to Rs.120 crores.
\nRespondent No.6 Bank should have taken all necessary steps to recover the
\ndebts and to enforce its rights under Sections 13 and 14 of the Securitisation
\nAct, 2002 and Sections 19 and 31A of the Recovery of Debts Due to Bank
\nAct, 1993.  The Bank can proceed against the original security and the
\nsecured assets of the borrowers and recover its dues.  Writing off bad debts
\nwas detrimental to the interest of a banking company.\n<\/p>\n
It is no doubt true that amounts advance by banks must be recovered.
\nSuch debts should not be permitted to become non-performing assets.
\nHowever, one cannot lose sight of the realities of the situation.  Having
\nregard to the nature of banking business, it is possible that the Bank may
\ncommit an error of judgment in advancing funds to a particular party or
\nindustry.  It may be that on account of other factors beyond its control, or
\neven beyond the control of the borrowers, it may become difficult, or even
\nimpossible to recover the loan advanced in accordance with the schedule of
\nre-payment, or to recover the loan at all.  These are risks inherent in the
\nbanking business, though a wise banker with foresight and anticipation may
\nreduce such risks to the minimum level.  One cannot however, jump to the
\nconclusion that only because some of the debts have become bad, there is
\nlack of proper management of the Bank, or that the conduct of the Bank is
\ndishonest or mala-fide.  In a given case, there may be evidence of such mis-
\nmanagement or dishonest conduct, but in the absence of any such accusation
\none cannot draw an adverse inference against the Bank.  In the instant case,
\nthough some of the debts have to be written off, with little chance of
\nsubstantial recovery, we cannot lose sight of the fact that the Bank has
\ngenerated considerable operating profits and has built up a substantial
\ngeneral reserve over the years, against which the debts written off have been
\nadjusted.\n<\/p>\n
We, therefore, find no merit in this appeal.  The same is accordingly
\ndismissed but without any order as to costs.\n<\/p>\n
                                                                       ..J
\n                                                                           (B. P. SINGH )<\/p>\n
                                                                       ..J
\n                                                                       ( ALTAMAS KABIR )
\nNew Delhi ;\n<\/p>\n
May  11, 2006<\/p>\n
IN THE SUPREME COURT OF INDIA<\/p>\n
CIVIL APPELLATE JURISDICTION<\/p>\n
TRANSFERRED CASE NO.48 OF 2005
\n(Arising out of T.P. No.1 of 2005)<\/p>\n
Salim Akbarali Nanji\t\t\t    \t\t    Appellant
\nVersus
\nUnion of India & Ors.\t\t\t     \t\t  Respondents<\/p>\n
J U D G M E N T <\/p>\n
B.P. SINGH, J.\n<\/p>\n
\tThe issues involved in this case are the same as in the connected civil
\nappeal which we have dismissed by our judgment and order today.  In this
\ncase as well the petitioner prayed for quashing or setting aside the
\npermission granted by the Reserve Bank of India to the Respondent Bank to
\nwrite off the non-performing assets.  The petitioner had filed a writ petition
\nbefore the High Court of Judicature at Bombay being Writ Petition No.2615
\nof 2004. By our order dated July 25, 2005, the case was transferred to this
\nCourt so as to be heard and disposed of with the connected civil appeal.
\nThis case is also dismissed but without any order as to costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Salim Akbarali Nanji vs Union Of India & Ors on 11 May, 2006 Author: B Singh Bench: B. P. Singh, Altamas Kabir CASE NO.: Appeal (civil) 6715 of 2004 PETITIONER: Salim Akbarali Nanji RESPONDENT: Union of India & Ors. DATE OF JUDGMENT: 11\/05\/2006 BENCH: B. P. SINGH & ALTAMAS KABIR JUDGMENT: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-173089","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nSalim Akbarali Nanji vs Union Of India & Ors on 11 May, 2006 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/salim-akbarali-nanji-vs-union-of-india-ors-on-11-may-2006\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Salim Akbarali Nanji vs Union Of India & Ors on 11 May, 2006 - 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