KIIT SCHOOL OF LAW, KIIT UNIVERSITY

BHUBANESWAR-24

SUBJECT NAME:
PRINCIPLES OF TAXATION

TOPIC:
CASE COMMENTARY ON
Mukand Global Finance Ltd. v. CIT, 2007 SCC OnLine ITAT 27

SUBMITTED TO:
DR. BINEET KEDIA

SUBMITTED BY:
SHUBHKRIT RAJ
2183125
B.A.LL.B

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 Mukand Global Finance Ltd. v. CIT, 2007 SCC OnLine ITAT 27

FACTS OF THE CASE:

The case of Mukand Global Finance Ltd. v. CIT, 2007 arose out of an assessment order
passed by the Income Tax Officer (ITO) for the assessment year 2006-07. The ITO had
disallowed the assessee, Mukand Global Finance Ltd. (MGL), a deduction of Rs. 1,01,40,295
for provisions made for non-performing assets (NPAs) and a deduction of Rs. 34,43,668 for
the loss on sale of a flat. MGL challenged the ITO's order before the Income Tax Appellate
Tribunal (ITAT).
Facts Regarding the Provision for NPAs
MGL is a non-banking finance company (NBFC) registered under the Companies Act, 1956.
NBFCs are regulated by the Reserve Bank of India (RBI), which prescribes prudential norms
for the classification and valuation of assets. In accordance with these norms, NBFCs are
required to make provisions for NPAs.
MGL had made a provision of Rs. 1,01,40,295 for NPAs during the assessment year 2006-07.
The ITO disallowed this deduction on the ground that the provision was not made in
accordance with the RBI's prudential norms. MGL challenged the ITO's decision on the basis
that the provision was made in accordance with its internal classification of accounts, which
was based on the RBI's guidelines.
Facts Regarding the Loss on Sale of a Flat
MGL had acquired a flat for Rs. 1,00,00,000 in 2002. In 2006, MGL sold the flat for Rs.
65,56,332. MGL claimed a deduction of Rs. 34,43,668 representing the loss on sale of the
flat. The ITO disallowed this deduction on the ground that the flat was not held for the
purpose of earning income from a business or profession. MGL challenged the ITO's decision
on the basis that the flat had been acquired for the purpose of earning income from the
business of financing and that the loss on sale was a consequence of this business activity.

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 ISSUES RAISED:

1. Deductibility of provisions for non-performing assets (NPAs): Mukand Global Finance

Ltd., a non-banking finance company (NBFC), had made a provision of Rs. 1,01,40,295 for
NPAs during the assessment year 2006-07. The Income Tax Officer (ITO) disallowed this
deduction on the ground that the provision was not made in accordance with the Reserve
Bank of India (RBI)'s prudential norms. Mukand Global Finance Ltd. challenged the ITO's
decision before the Income Tax Appellate Tribunal (ITAT).

2. Set-off of loss on sale of a flat: Mukand Global Finance Ltd. had acquired a flat for Rs.
1,00,00,000 in 2002. In 2006, Mukand Global Finance Ltd. sold the flat for Rs. 65,56,332.
Mukand Global Finance Ltd. claimed a deduction of Rs. 34,43,668 representing the loss on
sale of the flat. The ITO disallowed this deduction on the ground that the flat was not held for
the purpose of earning income from a business or profession. Mukand Global Finance Ltd.
challenged the ITO's decision before the ITAT.

The ITAT upheld Mukand Global Finance Ltd.'s contention on both issues.
*On the issue of deductibility of provisions for NPAs,* the ITAT held that the provision
was allowable as a deduction under Section 36(1)(vii) of the Income Tax Act, 1961. The
ITAT held that the provision was made in accordance with the RBI's prudential norms and
that Mukand Global Finance Ltd. had sufficient evidence to support its claim that the
provision was made for genuine bad debts.
*On the issue of set-off of loss on sale of a flat,* the ITAT held that the loss on sale of the
flat was a business loss and was therefore allowable as a deduction under the head "Profits
and Gains of Business and Profession". The ITAT noted that the flat had been acquired for
the purpose of earning income from the business of financing and that the loss on sale was a
consequence of this business activity.
The ITAT's decision in Mukand Global Finance Ltd. v. CIT, 2007 has provided valuable
guidance on the deductibility of provisions for NPAs and the setting off of losses from
property transactions. The decision confirms that provisions for NPAs made by NBFCs in
accordance with prudential norms are allowable as a deduction under the Income Tax Act. It
also clarifies that business losses can be set off against income from other business activities.

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 ARGUMENTS

Arguments by Mukand Global Finance Ltd.

On the issue of deductibility of provisions for NPAs:
* The provision for NPAs was made in accordance with the prudential norms prescribed by
the Reserve Bank of India.
* The provision was made for genuine bad debts.
* The provision was necessary to protect the assessee's business from financial risk.
On the issue of set-off of loss on sale of a flat:
* The flat was held for the purpose of earning income from a business or profession.
* The loss on sale of the flat was a consequence of the assessee's business activities.
* The loss on sale of the flat should be allowed as a deduction under the head "Profits and
Gains of Business and Profession".

Arguments by the Income Tax Officer (ITO)

On the issue of deductibility of provisions for NPAs:
* The provision for NPAs was not made in accordance with the prudential norms prescribed
by the Reserve Bank of India.
* The provision was not made for genuine bad debts.
* The provision was not necessary to protect the assessee's business from financial risk.
On the issue of set-off of loss on sale of a flat:
* The flat was not held for the purpose of earning income from a business or profession.
* The loss on sale of the flat was not a consequence of the assessee's business activities.
* The loss on sale of the flat should not be allowed as a deduction under the head "Profits and
Gains of Business and Profession".

Arguments by the Income Tax Appellate Tribunal (ITAT)

On the issue of deductibility of provisions for NPAs:
* The provision for NPAs was allowable as a deduction under Section 36(1)(vii) of the
Income Tax Act, 1961.
* The provision was made in accordance with the RBI's prudential norms.

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* Mukand Global Finance Ltd. had sufficient evidence to support its claim that the provision
was made for genuine bad debts.

On the issue of set-off of loss on sale of a flat:

* The loss on sale of the flat was a business loss and was therefore allowable as a deduction
under the head "Profits and Gains of Business and Profession".
* The flat had been acquired for the purpose of earning income from the business of
financing.
* The loss on sale was a consequence of this business activity.

JUDGEMENT
The ITAT held that the provision for NPAs was allowable as a deduction under Section 36(1)
(vii) of the Income Tax Act, 1961. The ITAT held that the provision was made in accordance
with the RBI's prudential norms and that MGL had sufficient evidence to support its claim
that the provision was made for genuine bad debts.

The ITAT also held that the loss on sale of the flat was a business loss and was therefore
allowable as a deduction under the head "Profits and Gains of Business and Profession". The
ITAT noted that the flat had been acquired for the purpose of earning income from the
business of financing and that the loss on sale was a consequence of this business activity.

The ITAT's decision in Mukand Global Finance Ltd. v. CIT, 2007 has provided valuable
guidance on the deductibility of provisions for NPAs and the setting off of losses from
property transactions. The decision confirms that provisions for NPAs made by NBFCs in
accordance with prudential norms are allowable as a deduction under the Income Tax Act. It
also clarifies that business losses can be set off against income from other business activities.

SIGNIFICANCE OF THE JUDGEMENT

The ITAT's decision in Mukand Global Finance Ltd. v. CIT, 2007 is a landmark decision that
has had a significant impact on the taxation of NBFCs in India. The decision has been cited
with approval by courts and tax authorities in a number of subsequent cases.

The decision is important for a number of reasons:

* It provides clarity on the deductibility of provisions for NPAs made by NBFCs.
* It clarifies the distinction between business losses and capital losses.
* It emphasizes the importance of proper documentation in supporting claims for deductions.

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The decision has been welcomed by NBFCs, as it provides them with greater certainty about
their tax liabilities. It has also been welcomed by tax authorities, as it provides them with a
clearer framework for assessing the deductibility of provisions for NPAs.
Overall, the ITAT's decision in Mukand Global Finance Ltd. v. CIT, 2007 is a positive
development for the Indian financial sector. It provides much-needed guidance on an
important issue and helps to promote transparency and certainty in the tax treatment of
NBFCs.