The Hindu Business Line : When laws clash

THE Income-tax Act, 1961 is a self-contained code seeking to primarily tax the incomes of assessees. This Act is made up of several chapters, such as basis of charge, incomes which do not form part of total income, computation of total income, deductions to be made in computing total income, and so on.

This piece of legislation has evolved over a period of time through various circulars and judicial rulings.

There is a feeling in certain quarters that this Act has become extremely unwieldy and cumbersome to administer.

Several controversies have arisen as to how to interpret the Act vis-à-vis other legislation, such as the Companies Act, 1956, the Reserve Bank of India [RBI] Act, the Securities and Exchange Board of India Regulations, and so on.

Recently, a conflict relating to determination of income of a financial institution in the context of guidelines issued by the RBI came up before the Delhi Bench of the Tribunal (TEDCO Investments and Financial Services (P) Ltd vs Dy. Commissioner of Income-tax (2003 87 ITD 298)).

Facts, issues

The assessee-company, an NBFC, filed its return declaring a loss. The various incomes shown were from interest, lease rent, bills discounting charges and dividend.

The assessing officer (AO) observed from the auditor's report that lease rentals, interest and bills discounting charges, not realised for more than six months, amounting to Rs 1,76,53,665 had not been properly accounted for and, therefore, brought the same to tax.

The assessee's plea that they had adopted a different accounting system, that is, the NBFCs Prudential Norms (Reserve Bank Directions) issued vide Notification No. DFC 119/DG-SPT-98 of January 31, 1998, was not accepted by the AO, taking note of the fact that the company had not been registered as an NBFC with the RBI.

Thus, according to the AO, the question of applicability of NBFCs Prudential Norms did not arise and for arriving at the correct income the provisions of I-T Act were to be applied.

Further, the AO also viewed that the Act is a statute passed by Parliament and cannot be governed by any notifications issued by any other agency.

The AO also took into consideration the fact that the Notification No 69(E) of January 25, 1996, issued by the CBDT as accounting standard to be followed by the assessee following the mercantile system of accounts did not give any choice to the assessee to change its accounting system from mercantile to cash.

Therefore, he took Rs 1,76,53,665 as income accrued in the year under consideration and added to the total income of the assessee.

The Commissioner (Appeals) was of the view that as on the date of the accounting year, that is, March 31, 1998, the assessee-company was not registered as an NBFC and, consequently, the RBI directions would not apply. He was also of the view that the directions given by the RBI were not relevant because of the special provision enumerated in Section 145(2). The matter reached the Tribunal.

Provisions explained

Section 45Q of the RBI Act states that the provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

The power to issue directions on accounting and related matters is contained in Section 45JA of the RBI Act, which is placed in Chapter IIIB of the said Act. The prudential norms relating to income recognition, provision for doubtful debts have been issued by the RBI pursuant to this power contained in the said Act.

Hence, the language employed clearly establishes that this overrides the provisions of any other law in force which includes the Act.

Income has to be determined in accordance with the provisions of the I-T Act and profits form business has to be computed with reference to the method of accounting employed by the assessee.

In the case under consideration, the company had adopted the mercantile system of accounting and had diligently followed the directions of the regulator — the RBI — in the matter of income recognition. The short question in this case was on which provision — of the RBI Act or the I-T Act — would prevail.

Court decision

The Tribunal held that the addition made by the AO is unjustified and the provisions of the RBI Act overrides those of the I-T Act. The Tribunal reasoned that... "The RBI is empowered to determine the policy and give directions to all and any of the financial companies relating to income recognition, accounting standards, making of proper provision for bad and doubtful debts... and such NBFCs shall be bound to follow the policy so determined and the direction so issued.

"Accordingly, wide and vast powers have been given by the Legislature to the RBI to govern a specified class of companies, i.e., NBFCs, whose functioning is monitored by the RBI by way of granting them certificate of registration under Section 45-IA of the RBI Act. Accordingly, the AO cannot ignore the provisions of Chapter IIIB of the RBI Act and the prudential norms issued by it from time to time in exercise of the power vested in it".

In view of this, the Tribunal held that the additions made by the AO were not sustainable. The Tribunal also addressed the issue of certificate of registration and held that "Since the certificate of registration was available with the assessee, then the applicability of prudential norms could not be questioned on the basis of argument that prudential norms are delegated legislation and, as such, they will not override the Act which is an Act of Parliament".

This decision of the Tribunal has reasoned the issue of conflict among statutes. The problem is accentuated if more that two statutes are involved and different views emerge on the same matter.

A coordinated approach among various wings of the same Ministry is called for to avoid such conflicts. It is in the long-term interest of all concerned that these conflicts should not be left for adjudication. These can be solved by legislative amendments to the I-T Act or through clarificatory circulars.

Article E-Mail :: Comment :: Syndication

Stories in this Section
More protection for overseas investments

Iraq contracts and US doublespeak

Throwing stones into still waters

No entry for earthmovers

When laws clash

A war of words

Re-write the farm trade rules

Splitting shares over face-value