Tax treatment of leased assets, sticky loans and loan portfolio losses turns on ownership, accrual and statutory deduction conditions.

Depreciation on leased vehicles may be claimed by the lessor where contractual and factual indicia show ownership and business use. Interest on sticky loans does not accrue on a merely theoretical basis when recovery is doubtful, even under the mercantile system and despite RBI prudential norms. A provision for doubtful debts is not deductible merely because it follows RBI provisioning requirements. Bad debts written off need not be proved irrecoverable, but statutory conditions for the deduction must still be satisfied. Loss on sale of a delinquent loan portfolio can constitute a business loss where the receivables arise in the ordinary course of the financing business. Levy of interest under sections 234B, 234C and 234D depends on verification of the relevant factual and statutory conditions.

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Issues: (i) Whether depreciation on leased vehicles was allowable to the lessor as owner of the vehicles. (ii) Whether interest on sticky loans was taxable on accrual basis despite non-recognition under RBI prudential norms. (iii) Whether provision for doubtful debts was deductible. (iv) Whether bad debts written off were allowable without proving irrecoverability, subject to compliance with statutory conditions. (v) Whether loss on sale of delinquent loan portfolio was allowable as a business loss. (vi) Whether interest under sections 234D, 234B and 234C was leviable in the circumstances considered.

Issue (i): Whether depreciation on leased vehicles was allowable to the lessor as owner of the vehicles.

Analysis: The vehicles were given under lease arrangements, and the question was whether the transactions were genuine leases or financing arrangements in substance. The reasoning turned on the ownership clauses, repossession rights, inspection rights, restrictions on alienation, and the absence of any claim of depreciation by the lessees. The decision followed the later treatment of similar agreements in the assessee's own cases and the principle that the lessor can be treated as the owner for depreciation purposes when the contractual and factual indicia show ownership and user for business.

Conclusion: The issue was decided in favour of the assessee and the depreciation claim on leased vehicles was allowed.

Issue (ii): Whether interest on sticky loans was taxable on accrual basis despite non-recognition under RBI prudential norms.

Analysis: The assessee, an NBFC, did not recognise interest on doubtful advances in accordance with RBI norms. The decision applied the principle that income does not accrue merely on a theoretical basis where realisation is uncertain, and that the departmental treatment must follow the settled approach for sticky loans as laid down in binding precedent. The mercantile system did not compel taxation of hypothetical income where collection was doubtful.

Conclusion: The issue was decided in favour of the assessee and the addition on account of interest on sticky loans was deleted.

Issue (iii): Whether provision for doubtful debts was deductible.

Analysis: The provision was made in terms of RBI prudential norms for NBFCs, but those norms govern presentation and provisioning in the accounts and do not by themselves determine allowability under the Income-tax Act. The governing principle was that a mere provision for non-performing assets is not an allowable expenditure for tax computation.

Conclusion: The issue was decided against the assessee and the disallowance of provision for doubtful debts was sustained.

Issue (iv): Whether bad debts written off were allowable without proving irrecoverability, subject to compliance with statutory conditions.

Analysis: The write-off of debts in the accounts was not disputed, and after the statutory amendment it was not necessary to prove actual irrecoverability. However, the statutory conditions relating to the nature of the debt and its nexus with income or money-lending activity still had to be examined. Since the necessary details were not furnished, the matter required verification of the statutory preconditions.

Conclusion: The issue was restored to the assessing authority for examination of the statutory conditions, and the claim was not finally accepted or rejected on merits.

Issue (v): Whether loss on sale of delinquent loan portfolio was allowable as a business loss.

Analysis: The loan portfolio represented receivables generated in the ordinary course of the assessee's financing business and was treated as part of business assets rather than capital assets. The sale was an outright commercial disposal of stressed assets undertaken to minimise business loss. The loss was therefore regarded as arising in the course of business and, in substance, as a trading loss rather than a capital loss.

Conclusion: The issue was decided in favour of the assessee and the loss on sale of loan portfolio was allowed.

Issue (vi): Whether interest under sections 234D, 234B and 234C was leviable in the circumstances considered.

Analysis: The levy of interest depended on factual verification, especially whether any refund had in fact been granted and whether the statutory preconditions for charging interest were met. Where the existence of refund itself was uncertain, the matter had to be verified by the assessing authority. The interest under sections 234B and 234C was treated as consequential to the final recomputation.

Conclusion: The issues relating to interest were either remitted for verification or treated as consequential, and no final adverse tax liability was affirmed on the facts recorded.

Final Conclusion: The composite decision substantially favoured the assessee on the main substantive controversies, while sustaining the disallowance of the provision for doubtful debts and remanding certain interest and bad-debt questions for verification or fresh examination.

Ratio Decidendi: For depreciation and business-income claims, the substance of the transaction, the contractual indicia of ownership, and the statutory conditions for deduction govern the tax result; RBI provisioning norms do not by themselves determine deductibility under the Income-tax Act, and hypothetical income does not accrue where recovery is uncertain.

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