MIS. SOUTHERN TECHNOLOGIES LTD. versus JOINT COMMISSIONER OF INCOME TAX, COIMBATORE

Citation: [2010] 1 S.C.R. 380 · Decided: 11-01-2010 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Dismissed

Judgment (excerpt)

A 
B 
(2010) 1 S.C.R. 380 
MIS. SOUTHERN TECHNOLOGIES LTD. 
v. 
JOINT COMMISSIONER OF INCOME TAX, COIMBATORE 
(Civil Appeal No. 1337 of 2003) 
JANUARY 11, 2010 
[S.H. KAPADIA AND AFTAB ALAM, JJ.] 
Income Tax Act, 1961: 
c 
s.2(24) - Provision for NPA - Debited by NBFC to the 
P&L Account - In terms of Para 9(4) of the RBI Directions 
1998 - Whether the provision for NPA to be treated as income 
under s.2(24) of the Act- Held: RBI directions· deal with the 
presentation of the provision for NPA in the Balance Sheet 
0 
of NBFC - The Directions are only disclosure norms and are 
not related with the computation of total taxable income under 
IT Act or with the accounting treatment - Not to be treated as 
"income" under s. 2(24) of the Act - RBI Directions 1998 -
Para 9(4). 
E 
s.36(1)(vii) - Provision for NPA debited to the P&L 
Account by NBFC in terms of RBI Directions 1998 - Claim 
for deduction under s.36(1)(vii) - Entitlement for - Held: Not 
entitled as the provision does not constitute expense. 
F 
s.36(1)(viia) and s.43D - Different treatment for NBFC 
and banks for deduction under s.36(1)(viia) and s.43D -
Constitutional validity of - Held: s. 36(1 )(viia) provides for 
deduction not only in respect of "written off' bad debt but in 
case of banks it extends the allowance also to any Provision 
G for bad and doubtful debts made by banks which incentive is 
not given to NBFCs - Banks face a huge demand from the 
industry and at times face liquidity crunch - Thus, the line of 
business operations of NBFCs and banks are quite different 
- It is for this reason, apart from social commitments which 
1-1 
380 
SOUTHERN TECHNOLOGIES LTD. v. JOINT COMMNR. 381 
OF INCOME TAX, COIMBATORE 
banks undertake, that allowances of the nature mentioned in 
A 
s.36(1)(viia) and 43D are often restricted to banks and not to 
NBFCs - Neither s.36(1)(viia) nor s.43D violates Article 14 -
The test of "intelligible differentia" stands complied with -
Constitution of India, 1950 - Article 14, 19(1)(g). 
B 
RBI Directions 1998: 
Scope and applicability of - Discussed. 
Para 9(4) - Analysis of - Held: RBI directions deal with 
the presentation of provision for NPA in the Balance Sheet C 
of NBFC - The Directions do not recognize the "income" 
under the mercantile system - IT Act and the 1998 Directions 
operate in different fields -
The primary object of 1998 
Directions is prudence, transparency and disclosure - The 
basis of 1998 Directions is that anticipated losses must be o 
taken into account but expected income need not be taken 
note of - Therefore, these Directions ensure cash liquidity for 
NBFCs which are now required to state true and correct profits, 
without projecting inflated profits - The nature of expenditure · 
under the IT Act cannot be conclusively determined by the 
E 
manner in which accounts are presented in terms of 1998 
Directions - RBI Directions 1998, though deviate from 
accounting practice as provided in the Companies Act, do not 
override the provisions of the IT Act - Income Tax Act, 1961 
- Companies Act, 1956. 
F 
The question which arose for consideration in these 
appeals filed by Non-Banking Financial Companies 
(NBFC) is whether the "Provision for NPA", which in 
terms of RBI Directions 1998 is debited to the P&L 
Account is to be treated as "income" under Section 2(24) 
G 
of the Income Tax Act, 1961 while computing the profits 
and gains of the business under Sections 28 to 430 of 
the Act. 
Dismissing the appeals, the Court 
H 
A 
382 
SUPREME COURT REPORTS 
[201 O] 1 S.C.R. 
HELD: 1.1. The RBI Directions 1998 deal with 
Presentation of NPA provision in the Balance Sheet of an 
NBFC. By Para 9 of 1998 Directions, RBI mandated that 
every NBFC should disclose in its Balance Sheet, the 
Provision without netting them from the Income or from 
B the value of the assets and that the provision should be 
distinctly indicated under the separate heads of accounts 
as: - (i) provisions for bad and doubtful debts, and (ii) 
provisions for depreciation in investments in the Balance 
Sheet under "Current Liabilities and Provisions" and that 
C such provision for each year should be debited to P&L 
Account so that a true and correct figure of "Net Profit" 
gets reflected in the financial accounts of the company. 
The effect of such Disclosure is to increase the current 
liabilities by showing the provision against the possible 
0 Loss on assets classified as NPA. An NPA continues to 
be an Asset - "Debtors/ Lo

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