Delhi High Court

Commissioner Of Income Tax vs M/S Vasisth Chay Vyapar Ltd. on 29 November, 2010

Author: A.K.Sikri

                                          REPORTABLE

*                IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                  ITA 552/2005, ITA 565/2005
                                   ITA 1191/2007, ITA 139/2008
                                    ITA 466/2008, ITA 537/2008
                                          ITA 408/2003

%                                                      Judgment Reserved on: 05.10.2010
                                                       Judgment Delivered on:29.11.2010

(1)      ITA 552 OF 2005

COMMISSIONER OF INCOME TAX                  . . . APPELLANT
                 Through : Mr.Sanjeev Sabharwal, Sr. Standing
                           Counsel.
                      VERSUS

M/S VASISTH CHAY VYAPAR LTD.                . . .RESPONDENT
                  Through: Mr. Ajay Vohra, Advocate with Ms.
                           Kavita Jha, Ms. Akansha
                           Aggarwal,Advocates

(2)     ITA 565 OF 2005

COMMISSIONER OF INCOME TAX                 . . . APPELLANT
                Through : Mr.   Sanjeev    Sabharwal,   Sr.
                          Standing Counsel

                                            VERSUS

M/S VASISTH CHAY VYAPAR LTD.                . . .RESPONDENT
                  Through: Mr. Ajay Vohra, Advocate with Ms.
                           Kavita Jha, Ms. Akansha
                           Aggarwal,Advocates

(3)     ITA 1191/2007

COMMISSIONER OF INCOME TAX                . . . APPELLANT
                Through : Ms.Prem Lata Bansal, Sr. Standing
                          Counsel.

                                            VERSUS

M/S VASISTH CHAY VYAPAR LTD.               . . .RESPONDENT
               Through:   Mr. Ajay Vohra, Advocate with Ms.
                          Kavita Jha, Ms. Akansha
                          Aggarwal,Advocates
(4) ITA 139/2008

COMMISSIONER OF INCOME TAX                                             . . . APPELLANT


ITA 552/2005, ITA 565/2005,ITA 1191/2007,                                  Page 1 of 18
ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003
                                 Through :              Ms.Prem Lata Bansal, Sr. Standing
                                                       Counsel.

                                            VERSUS

M/S VASISTH CHAY VYAPAR LTD.               . . .RESPONDENT
               Through:   Mr. Ajay Vohra, Advocate with Ms.
                          Kavita Jha, Ms. Akansha
                          Aggarwal,Advocates
(5) ITA 466/2008

COMMISSIONER OF INCOME TAX              . . . APPELLANT
             Through :  Ms.Prem Lata Bansal, Sr. Standing
                        Counsel.

                                            VERSUS

M/S VASISTH CHAY VYAPAR LTD.               . . .RESPONDENT
               Through:   Mr. Ajay Vohra, Advocate with Ms.
                          Kavita Jha, Ms. Akansha
                          Aggarwal,Advocates
(6) ITA 537/2008

COMMISSIONER OF INCOME TAX              . . . APPELLANT
             Through :  Ms.Prem Lata Bansal, Sr. Standing
                        Counsel.

                                            VERSUS

M/S VASISTH CHAY VYAPAR LTD.               . . .RESPONDENT
              Through:    Mr. Ajay Vohra, Advocate with Ms.
                          Kavita Jha, Ms. Akansha
                          Aggarwal,Advocates
(7) ITA 408/2003

COMMISSIONER OF INCOME TAX              . . . APPELLANT
              Through : Ms.Prem Lata Bansal, Sr. Standing
                        Counsel.

                                            VERSUS

M/S TED CO. INVESTMENT & FINANCIAL          . . .RESPONDENT
SERVICES (P) LTD.
                  Through: Mr. Ajay Vohra, Advocate with Ms.
                           Kavita Jha, Ms. Akansha
                           Aggarwal,Advocates

CORAM :-

        HON'BLE MR. JUSTICE A.K. SIKRI
        HON'BLE MS. JUSTICE REVA KHETRAPAL

        1.       Whether Reporters of Local newspapers may be allowed

ITA 552/2005, ITA 565/2005,ITA 1191/2007,                                   Page 2 of 18
ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003
                  to see the Judgment?
        2.       To be referred to the Reporter or not?
        3.       Whether the Judgment should be reported in the Digest?




A.K. SIKRI,J.

1. The question of law which has been raised in all these appeals,

pertaining to different assessment years of the same assessee, is

common one.

2. To state in brief, the assessee herein had advanced certain

Inter Corporate Deposits (ICD) to M/s Shaw Wallace Company. The

interest thereupon could not be received by the assessee for more

than six months. The assessee is a Non-Banking Financial Company

(NBFC) and, therefore, is bound by the directions given by the

Reserve Bank of India. These directions, inter alia, mandate a NBFC

to declare such advances as Non Performing Assets (NPA) when the

accrued interest therein is not paid by the debtor continuously for six

months. In these circumstances, treating the said ICD as NPA, the

assessee did not show interest income, which according to the

assessee was not realizable. The Assessing Officer, however, added

the interest as income of the assessee holding that it had "accrued"

to the assessee even if it was not actually realized as the assessee

was following mercantile system of accounting. The CIT (A) affirmed

the order of the Assessing Officer. However, the ITAT has deleted the

aforesaid interest income.

3. In this backdrop, the question raised is as to whether the ITAT

erred in law and on merits by deleting the additions of income made

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 as interest earned/acquired on the loan advanced to M/s Shaw

Wallace by considering the interest as doubtful and unrealizable.

4. Now the facts in detail.

5. The lower authorities held that the provisions of the Reserve

Bank of India Act, 1934 read with NBFCs Prudential Norms (Reserve

Bank) Directions, 1998 could not override the provisions of the

Income-Tax Act, 1961 where under the amount of interest was,

according to the lower authorities, taxable under the accrual system

of accounting. This stand of the assessee was not accepted by the

Assessing Officer or the CIT (A) as noted above. According to them

interest income had accrued to the assessee under the provisions of

the Income Tax Act as is clear from the reading of Section 5 of the

Act. It was their view that the provisions of Reserve Bank of India

Act, 1934 or the directions of the RBI issued under the said Act could

not over ride the provisions of Income Tax Act wherein the amount of

interest was taxable under the accruable system of accounting. The

Income-Tax Appellate Tribunal, on the other hand, has taken the view

that the provisions of Section 45Q of the RBI Act overriding the

provisions of the Income-Tax Act. The action of the respondent in not

crediting income from the loan advanced to Shaw Wallace, following

the RBI Act and the Prudential Norms issued thereunder, was correct

and in accordance with law. The Tribunal accordingly held that in

terms of Section 145 of the Act, no addition could be made in the

hands of the respondent in respect of such unrealized interest when

the loan/ICD was admittedly NPA.

6. Learned counsel for the Revenue referred to the judgment of

the Supreme Court in the case of Southern Technologies Ltd. Vs.

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 Joint Commissioner of Income-Tax, 320 ITR 577 and on that

basis he argued that in so far as liability of Income Tax is

concerned, the same was governed by the Income-Tax Act and

merely because for accounting purposes, the respondent assessee

was to follow the RBI guidelines, it would not mean that the assessee

was not liable to show the interest income when it had "accrued" to

the assessee under the mercantile system and exigible to tax under

the Act.

7. Mr. Vohra, learned counsel appearing for the assessee

countered the aforesaid submission with all the vehemence at his

command and sought to justify the orders of the Tribunal. His first

and foremost submission was that as per the provisions of Section

45Q of the RBI Act, interest income in respect of NPA are to be

recognized in terms of the Prudential Norms. He took support from

the judgment of the Apex Court in TRO Vs. Custodian, Special

Court Act, 1934, 293 ITR 369 wherein it was held that where an Act

makes a provision with non-obstante clause that would override the

provisions of all other Acts. In addition, he referred to the judgment

of Gujarat High Court in the case of Barkha Investment And

Trading Company (Private Ltd. Vs. CIT, 281 ITR 31, that of

Uttrakhand High Court in the case of CIT Vs. Nainital Bank Ltd.,

309 ITR 335 and Madras High Court in the case of CIT Vs. Elgi

Finance Ltd. 293 ITR 357.

8. Placing heavy reliance upon Elgi Finance (supra), his

submission was that almost identical controversy was considered in

the said decision. In that case the assessee company was engaged in

the business of leasing, finance and hire purchase. On the ground

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 that in the profit and loss account of the previous year and in the

memo of the total income prepared for income-tax purpose for the

year in question, the assessee had not admitted the interest accrued

on a transaction in respect of hire purchase, leasing, bill discounting,

short term loan etc., the Assessing Officer proposed to bring the

accrued interest on those terms to tax as income of the assessee

relating to that assessment year. The assessee explained that as it

was an NBFC, those assets were to be treated as non-performing

assets in terms of the guidelines issued by the RBI and income

pertaining thereto was not to be considered as income. The

Assessing Officer did not accept the submission and held that as the

assessee company was following mercantile system of accounting,

both the income as well as the expenditure had to be accounted on

accrual basis. The appeal of the assessee was dismissed by the CIT

(A). On further appeal by the assessee, the Tribunal was of the view

that the lower authorities had erred in treating the interest on NPAs

as income of the assessee company for the relevant assessment year

and hence directed the Assessing Officer to delete the said interest

from the computation of the taxable income and allowed the appeal

filed by the assessee. On the aforesaid facts, the Madras High court

held that no interest could be said to have accrued on loans doubtful

of recovery which were classified as NPAs. Mr. Vohra also pointed

out that the Supreme Court by order dated 12th January, 2009 in CC

No. 29 of 2009 titled CIT Vs. KICM Investment Ltd. 310 ITR 4

dismissed the Special Leave Petition filed by the Department against

the decision of the Calcutta High Court, whereby the High Court

affirmed the order of the Tribunal holding that interest on non-

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 performing asset was not includible in the total income of the

assessee on accrual basis, even though the assessee was following

mercantile system of accounting. Mr. Vohra endeavoured to

distinguish the judgment of the Supreme Court in the case of

Southern Technology (supra).

9. Another submission of Mr. Vohra was that in any case no

income by way of interest accrued on the Inter Corporate Deposits

even under mercantile system of accounting could be subjected to

tax. The basis of this submission was that in view of the following

and undisputed facts, no income can be said to accrue to the

assessee:-

(a) The assessee had offered interest income on the ICD on accrual basis during the previous years relevant to assessment years 1995-96 and 1996-97.

(b) Such interest had not been received by the respondent assessee.

                 (c)      The respondent assessee had not accounted
                          for     interest       in    the    revised   accounts    for
                          assessment years 1998-99 and 1999-2000,
                          pursuant to being registered as NBFC.
                 (d)      No interest was accounted by the respondent

assessee in the succeeding assessment years as well.

(e) No interest was received by the assessee on the ICD until assessment year 2006-07.

(f) Shaw Wallace was passing through adverse financial crisis and there were winding up petitions pending against the said company in the court.

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003

10. He argued that income chargeable under the head "profit and

gains of business or profession" has to be determined as per the

method of accounting consistently followed by an assessee.

11. Predicated on the provisions of Section 145 (1) of the Income

Tax Act as well as Section 209 and 211 of the Companies Act, his

submission was that as per these provisions, it was incumbent upon

the assessee to confirm the mandatory accounting methods and

following those standards, the system of accounting consistently

followed by the assessee was in conformity with those accounting

standards which, inter alia, provided not to treat interest on ICD

due from Shaw Wallace, in view of uncertainty of ultimate collection

of interest due to the tight and precarious financial position of the

borrowers. He specifically referred to the account system-9 (AS-9) of

Institute of Chartered Accountants of India (ICAI) in this behalf. His

further submission was that the courts have held that even under

the accrual system of accounting it is illusory to take credit for

interest where the principal itself is doubtful of recovery. The Punjab

& Haryana High Court in the case of CIT Vs. Ferozepur Finance (P)

Ltd., 124 ITR 619 held that unless income accrued, there could be

no tax liability and that even in mercantile system of accountancy,

an assessee could forgo the whole or part of a debt, which was

irrecoverable, and the same could not be added to the income of the

assessee. The Court, referring to the decision of the Apex Court in

the case of Shoorji Vallabhdas, 46 ITR 144, observed as under:-

"A reading of the aforesaid passage clearly shows that income-tax is levied on income, whether mercantile system of accountancy is maintained or on cash basis. If income does not result at all, there cannot be levy of tax. It was further held

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 that even if an entry of hypothetical income is made in the books of account, but if the income does not result at all, when there is neither accrual nor receipt of income, no tax can be levied."

The Supreme Court had dismissed the Department‟s Special

Leave Petition in this case vide SLP (Civil) No. 8158 of 1981 {144 ITR

(St.) 50}.

12. The aforesaid principle was reiterated in the later judgment of

the Madras High Court in the case of CIT Vs. Motor Credit Co. (P)

Ltd. 127 ITR 572 wherein the Court held as under:-

"Regular mode of accounting only determines the mode of computing taxable income and the point of time at which the tax liability is attracted. It cannot determine or effect the range of taxable income to the ambit of taxation. Where no income has resulted, it cannot be said that income has accrued merely on the ground that the assessee has been following the mercantile system of accounting. Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. If no income has to materialised there can be no liability to tax a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account but, what should be considered is, whether the income has really materialised or resulted to the assessee. The question whether real income has materialised to the assessee has to be considered with reference to commercial and business realities of the situation in which the assessee has been placed and not with reference to the system of accounting".

...........

"The mercantile system of accounting can be only relevant only to determine the point of time at which tax liability is attracted and it cannot be relied on to determine whether income has, in fact, resulted or materialised in favour of the assessee merely because the assessee has been maintaining his accounts on the basis of mercantile system of accounting, the interest income on the outstanding in the two firms cannot be held to have accrued at the end of the

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 accounting year. Viewed against the background of commercial business realities of the situation in which the assessee was placed, the Tribunal came to the conclusion that it would be very unrealistic on the part of the assessee to take credit for a highly illusory interest. The Tribunal was fully justified in arriving at this conclusion."

In this case too, the Supreme Court has dismissed the

Revenue‟s Special Leave Petition vide SLP (Civil) 2806 of 1981 (149

ITR (St.) 93).

13. He argued that the Courts have also recognized the theory of

"real income" and held that notwithstanding that an assessee may

be following the mercantile system of accounting, the assessee could

only be taxed on real income and not any hypothetical/illusory

income. In this behalf he referred to the following case law:-

        (i)      UCO Bank Vs. CIT, 237 ITR 889 (SC)
        (ii)     CIT Vs. Shoorji Vallabhdas and Co. 46 ITR 144 (SC)
        (iii)    Godhra Electricity Co Ltd. Vs. CIT 225 ITR 746

14. He also countered that applying the aforesaid principles, this

Court has held that interest on sticky loans, where recovery of the

principal was doubtful, could not be said to have accrued even under

the mercantile system of accounting and, accordingly, such notional

interest could not be taxed as income of the assessee. It was so held

in the following cases:-

(i) CIT Vs. Goyal M.G. Gases (P) Ltd. 303, ITR 159

(ii) CIT Vs. Eicher Ltd. ITA No. 431/2009 dt. 15.7.2009

Mr. Vohra thus pleaded that the order of the Tribunal should not

be interfered with.

15. We have considered the respective submissions in proper their

perspective. Before we embark on the discussion on these

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 arguments, it would be useful to extract the relevant provisions of

the RBI Act and NBFCs Prudential Norms (Reserve Bank) Directions

1998. Section 45Q of the RBI Act, which starts with non-obstante

Clause, reads as under:-

"Chapter IIIB to override other laws.

45Q. 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".

16. It is not in dispute that on the application of the aforesaid

provisions of the RBI and the directions, the ICD advanced to M/s

Shaw Wallace by the assessee herein had become NPA. It is also not

in dispute that the assessee company being NBFC is bound by the

aforesaid provisions. Therefore, under the aforesaid provisions, it was

mandatory on the part of the assessee not to recognize the interest

on the ICD as income having regard to the recognized accounting

principles. The accounting principles which the assessee is

indubitably bound to follow are AS-9. Relevant portion of the said

accounting stand reads as under:-

9. Effect of Uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.

9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 time of sale or rendering of service even though payments are made by installments.

9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized."

17. In this scenario, we have to examine the strength in the

submission of learned counsel for the Revenue that whether it can

still be held that income in the form of interest though not received

had still accrued to the assessee under the provisions of Income Tax

Act and was, therefore, exigible to tax. Our answer is in the

negative and we give the following reasons in support:-

(1) First of all we would discuss the matter in the

light of the provisions of Income Tax Act and to

examine as to whether in the given

circumstances, interest income has accrued to

the assessee. It is stated at the cost of

repetition that admitted position is that the

assessee had not received any interest on the

said ICD placed with Shaw Wallce since the

assessment year 1996-97 as it had become

NPAs in accordance with the Prudential norms

which was entered in the books of accounts as

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 well. The assessee has further successfully

demonstrated that even in the succeeding

assessment years, no interest was received and

the position remained the same until the

assessment years 2006-07. Reason was

adverse financial circumstances and the

financial crunch faced by Shaw Wallace. So

much so, it was facing winding up petitions

which were filed by many creditors. These

circumstances, led to an uncertainty in so far as

recovery of interest was concerned, as a result

of the aforesaid precarious financial position of

Shaw Wallace. What to talk of interest, even

the principal amount itself had become doubtful

to recover. In this scenario it was legitimate

move to infer that interest income thereupon

has not "accrued". We are in agreement with

the submission of Mr. Vohra on this count,

supported by various decisions of different High

Courts including this court which has already

been referred to above.

(2) In the instant case, the assessee company being

NBFC is governed by the provisions of RBI Act.

In such a case, interest income cannot be said

to have accrued to the assessee having regard

to the provisions of section 45Q of the RBI and

Prudential Norms issued by the RBI in exercise

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 of its statutory powers. As per these norms,

the ICD had become NPA and on such NPA

where the interest was not received and

possibility of recovery was almost nil, it could

not be treated to have been accrued in favour of

the assessee.

18. As noted above, Mr. Sabharwal, argued that the case of the

assessee was to be dealt with for the purpose of taxability as per the

provisions of the Act and not the RBI Act which was the accounting

method that the assessee was supposed to follow. We have already

held that even under the Income Tax Act, interest income had not

accrued. Moreover, this submission of Mr. Sabharwal is based

entirely on the judgment of the Supreme Court in the case of

Southern Technology (supra). No doubt, in first blush, reading of

the judgment gives an indication that the Court has held that RBI

Act does not override the provisions of the Income Tax Act.

However, when we examine the issue involved therein minutely and

deeply in the context in which that had arisen and certain

observations of the Apex Court contained in that very judgment, we

find that the proposition advanced by Mr. Sabharwal may not be

entirely correct. In the case before the Supreme Court, the assessee

a NBFC debited ` 81,68,516 as provision against NPA in the profit

and loss account, which was claimed as deduction in terms of

Section 36 (1) (vii) of the Act. The assessing officer did not allow the

deduction claimed as aforesaid on the ground that the provision of

NPA was not in the nature of expenditure or loss but more in the

nature of a reserve, and thus not deductible under section 36(i) (vii)

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 of the Act. The assessing officer, however, did not bring to tax `

20,34,605 as income (being income accrued under the mercantile

system of accounting). The dispute before the Apex court centered

around deductibility of provision for NPA. After analyzing the

provisions of the RBI Act, their Lordships of the Apex Court observed

that in so far as the permissible deductions or exclusions under the

Act are concerned, the same are admissible only if such

deductions/exclusions satisfy the relevant conditions stipulated

therefor under the Act. To that extent, it was observed that the

Prudential Norms do not override the provisions of the Act.

However, the Apex Court made a distinction with regard to "Income

Recognition" and held that income had to be recognized in terms of

the Prudential Norms, even though the same deviated from

mercantile system of accounting and/or section 45 of the Income Tax

Act. It can be said, therefore, that the Apex Court approved the

„real income‟ theory which is engrained in the Prudential Norms for

recognition of revenue by NBFC. The following passage from the

judgment of the Apex Court would bring out the distinction noticed

by the Apex Court between permissible deductions/exclusions, on

the one hand, and income recognition on the other:-

"31. Before concluding on this point, we need to emphasise that the 1998 Directions has nothing to do with the accounting treatment or taxability of "income" under the IT Act. The two, viz., IT Act and the 1998 Directions operate in different fields. As stated above, under the mercantile system of accounting, interest / hire charges income accrues with time. In such cases, interest is charged and debited to the account of the borrower as "income"

is recognized under accrual system. However, it is not so recognized under the 1998 Directions and, therefore, in the matter of its Presentation under the said Directions, there would be an add back but not

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 under the IT Act necessarily. It is important to note that collectability is different from accrual. Hence, in each case, the assessee has to prove, as has happened in this case with regard to the sum of Rs. 20,34,605/-, that interest is not recognized or taken into account due to uncertainty in collection of the income. It is for the assessing officer to accept the claim of the assessee under the IT Act or not to accept it in which case there will be add back even under real income theory as explained hereinbelow".

38. The point to be noted is that the IT Act is a tax on "real income", i.e., the profits arrived at on commercial principles subject to the provisions of the IT Act. Therefore, if by Explanation to Section 36(1)(vii) a provision for doubtful debt is kept out of the ambit of the bad debt which is written off then, one has to take into account the said Explanation in computation of total income under the IT Act failing which one cannot ascertain the real profits. This is where the concept of "add back" comes in. In our view, a provision for NPA debited to P&L Account under the 1998 Directions is only a notional expense and, therefore, there would be add back to that extent in the computation of total income under the IT Act.

39. One of the contentions raised on behalf of NBFC before us was that in this case there is no scope for "add back" of the Provision against NPA to the taxable income of the assessee. We find no merit in this contention. Under the IT Act, the charge is on Profits and Gains, not on gross receipts (which, however, has Profits embedded in it). Therefore, subject to the requirements of the IT Act, profits to be assessed under the IT Act have got to be Real Profits which have to be computed on ordinary principles of commercial accounting. In other words, profits have got to be computed after deducting Losses/ Expenses incurred for business, even though such losses/ expenses may not be admissible under Sections 30 to 43D of the IT Act, unless such Losses/ Expenses are expressly or by necessary implication disallowed by the Act. Therefore, even applying the theory of Real Income, a debit which is expressly disallowed by Explanation to Section 36(1)(vii), if claimed, has got to be added back to the total income of the assessee because the said Act seeks to tax the "real income" which is income computed according to ordinary commercial principles but subject to the provisions of the IT Act. Under Section 36(1)(vii) read with the Explanation, a "write off" is a

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 condition for allowance. If "real profit" is to be computed one needs to take into account the concept of "write off" in contradistinction to the "provision for doubtful debt".

Applicability of Section 145

40. At the outset, we may state that in essence RBI Directions 1998 are Prudential/ Provisioning Norms issued by RBI under Chapter IIIB of the RBI Act, 1934. These Norms deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue of Section 45Q, an overriding effect is given to the Directions 1998 vis-a-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the "permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and Companies Act is only in the matter of Income Recognition and presentation of Financial Statements. The Accounting Policies adopted by an NBFC cannot determine the taxable income. It is well settled that the Accounting Policies followed by a company can be changed unless the AO comes to the conclusion that such change would result in understatement of profits. However, here is the case where the AO has to follow the RBI Directions 1998 in view of Section 45Q of the RBI Act. Hence, as far as Income Recognition is concerned, Section 145 of the IT Act has no role to play in the present dispute."

19. We have also noticed the other line of cases wherein the

Supreme Court itself has held that when there is a provision in other

enactment which contains a non-obstante clause, that would

override the provisions of Income Tax Act. TRO Vs. Custodian,

Special Court Act (supra) is one such case apart from other cases

of different High Courts. When the judgment of the Supreme Court

in Southern Technology (supra) is read in manner we have read,

ITA 139/2008,ITA 466/2008, ITA 537/2008,ITA 408/2003 it becomes easy to reconcile the ratio of Southern Technology

with TRO Vs. Custodian, Special Court Act.

20. Thus viewed from any angle, the decision of the Tribunal

appears to be correct in law. The question of law is thus decided

against the Revenue and in favour of the assessee. As a result, all