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Our Legal Correspondent

CHENNAI, April 18

IN a far-reaching ruling which brings relief to non-banking finance companies, the Madras High Court has ordered an interim injunction restraining the Central Board of Direct Taxes from assessing receivables as "income'' where such amounts had not been recognised as "income'' in the books of these companies

Responding to the petition filed by the Equipment Leasing Association (India), challenging the constitutional validity of the decision taken by the Central Board of Direct Taxes (2nd respondent) in taxing income of the non-banking finance companies (NBFC) on accrual basis in respect of bad and doubtful debts, Mr Justice Raviraj Pandian ordered the Board not to include the income from non-performing assets alone as per the Reserve Bank of India guidelines.

In its petition, the Association contended that while the Reserve Bank's guidelines were made applicable to banks and financial institutions, the Board did not apply the same stipulation to the NBFCs, which was "grossly discriminatory and also unreasonable and arbitrary''.

The Board had in its circular No 621 dated December 19, 1991 took note of the situation that as bad and doubtful debts were difficult to recover, taxing income on accrual basis reduced the liquidity of these institutions. However, it did not extend the same stipulation to the NBFCs.

The benefit of Section 43D of the Income-tax Act had been extended to housing finance companies and in that process the concept of non-performing assets (NPA) as per the Reserve Bank's directions was recognised in the I-T Act itself vide introduction of Rule 65B of the Income-tax Rules, 1962.

In the matter of NPAs, NBFCs were mandated to derecognise income in books of accounts as required by the prudential norms. However, they were forced to recognise such income for income tax purposes based on the principles of "accrual''.

The petitioner said that while banks and financial institutions enjoyed tax deductibility under Section 36(1)(vii-a) within the parameters laid down therein, this facility was not available to the NBFCs who also provided for NPAs based on the criteria laid down under the prudential norms.

This again clearly smacked of unreasonableness and arbitrariness amounting to hostile discrimination, and was, therefore unconstitutional.

According to the petitioner, once the RBI had issued directions and there were certain mandatory accounting standards, the interest on sticky advances could not partake the character of income under Entry 82 of Schedule VII of the Constitution.

The I-T Act could not treat as income receipts, which were not to be treated as income under any other law for the time being in force. NBFCs and banks came under the same category as far as application of prudential norms of the RBI was concerned.

The petitioner said that differentiation between persons in the same category amounted to hostile discrimination and was consequently unconstitutional and violative of Articles 14 and 19 of the Constitution.

There was no discernible reason behind such gross hostile discrimination.

The petitioner prayed for an order restraining the 2nd respondent from assessing receivables as "income'' where such amounts had not been recognised as "income'' in the books of accounts of the petitioner's members (who are all NBFCs).

While ordering the interim injunction restraining the respondents not to include the income from non-performing assets alone as per the RBI guidelines, the Judge said that the other proceedings might go on.

Notice was returnable by four weeks.

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