In Housing and urban Development Corporation Ltd v. ACIT, the Delhi High Court, while confirming the denial of claim of deduction on account of de-recognition of interest accruing upon Non Performing Assets (NPAs), held that in order to classify NPAs, the AO is bound to follow Rule 6EB of the Income Tax Rules.
Dismissing an appeal filed by the assesse, Justice S. Muralidhar and Justice Chander Sekhar clarified that while considering the claim of deduction for the purpose of the Income Tax Act, the guidelines of the National Housing Bank (NHP) has no relevance.
Assessee, 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. For the year under consideration, assessee claimed deduction towards interest on bad and doubtful debts known as Non-Performing Assets (‘NPAs’) according to the guidelines of National Housing Bank (‘NHB’) issued with effect from 31st March, 2005. As per the 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.
However, AO rejected the claim by invoking Rule 6EB of the Income Tax Rules, 1962 as per which, a loan can be treated as NPA 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. According to him, 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.
Appellants, who failed to secure any relief from the appellate authorities, approached the High Court.
The division bench observed that though the Assessee is governed by the instructions issued by the NHB as to what should be considered as an NPA, the permissibility of deduction for the purposes of computing the taxable income is depends on the provisions of the Act.
It was noticed that prior to 31st March, 2005 the criteria for terming a loan to be an NPA remained the same, both, in terms of the NHB guidelines as well as the Rules. After 31st March, 2005, the NHB guidelines mandated that where the interest on the loan was not received for a period of more than 90 days, it was to be treated as an NPA. However, Rule 6EB was no modified in accordance with the change.
The bench noted that Section 36 of the NHB Act states 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.”
The division bench also 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.”
Read the full text of the Judgment below.
