NPA provisioning under RBI norms is not a deductible write-off and does not override income-tax computation rules.

An NBFC's provision for non-performing assets under RBI Directions, 1998 is a prudential disclosure item and not a tax-deductible write-off under the Income-tax Act, 1961. The Court distinguished RBI accounting and disclosure norms from computation of taxable income, holding that such a notional provision may be added back where the Act so requires. It further ruled that the provision is not deductible under section 36(1)(vii) or section 37(1), because those provisions require an actual write-off or specific statutory allowance. RBI Directions do not override the Income-tax Act, and sections 36(1)(viia) and 43D were upheld as constitutionally valid.

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Issues: (i) Whether the provision for non-performing assets debited by an NBFC under RBI Directions, 1998 is taxable as income or is liable to be added back while computing business income under the Income-tax Act, 1961; (ii) Whether such provision is deductible under section 36(1)(vii) or section 37(1) of the Income-tax Act, 1961; (iii) Whether RBI Directions, 1998 override the Income-tax Act, 1961 or attract section 145 of that Act; (iv) Whether sections 36(1)(viia) and 43D of the Income-tax Act, 1961 are unconstitutional as violating Articles 14 and 19(1)(g) of the Constitution of India.

Issue (i): Whether the provision for non-performing assets debited by an NBFC under RBI Directions, 1998 is taxable as income or is liable to be added back while computing business income under the Income-tax Act, 1961.

Analysis: The provision required by the RBI directions was held to be a prudential and disclosure-based debit meant to present true and correct profits in the balance sheet of an NBFC. It did not determine the chargeability of income under the Income-tax Act. The Court distinguished between presentation of accounts under the RBI framework and computation of taxable income under the Act, and held that a notional provision of this kind cannot, by itself, prevent an add-back in income computation where the Act so requires.

Conclusion: The provision for NPA is not immune from add-back and does not, by itself, escape computation under the Income-tax Act.

Issue (ii): Whether such provision is deductible under section 36(1)(vii) or section 37(1) of the Income-tax Act, 1961.

Analysis: After the 1 April 1989 amendment, section 36(1)(vii) draws a clear distinction between an actual write-off and a mere provision for bad and doubtful debts. A provision for NPA is not a write-off of an irrecoverable debt. The Court also held that section 37(1) cannot be invoked to claim a deduction for an item which is specifically excluded by the scheme and explanation to section 36(1)(vii). The real income theory could not override this statutory distinction.

Conclusion: The provision is not deductible under section 36(1)(vii) or section 37(1).

Issue (iii): Whether RBI Directions, 1998 override the Income-tax Act, 1961 or attract section 145 of that Act.

Analysis: The Court held that RBI Directions, 1998 are issued under the Reserve Bank of India Act, 1934 for prudential regulation, income recognition, provisioning and disclosure. By virtue of section 45Q, they override inconsistent provisions in the Companies Act, 1956 in their field, but they do not override the Income-tax Act, 1961. Section 145, which governs computation of income, was held not to convert RBI-prescribed disclosure norms into tax-determining rules. The two enactments operate in different fields.

Conclusion: RBI Directions, 1998 do not override the Income-tax Act, 1961, and section 145 does not assist the assessee.

Issue (iv): Whether sections 36(1)(viia) and 43D of the Income-tax Act, 1961 are unconstitutional as violating Articles 14 and 19(1)(g) of the Constitution of India.

Analysis: The Court found an intelligible differentia between banks and NBFCs, based on the differing regulatory concerns of liquidity in banking and risk/transparency in NBFCs. Parliament was entitled to extend special deductions and deferral benefits selectively to banks. The classification was held to have a rational nexus with the statutory object, and the challenge under Article 19(1)(g) was rejected on the footing that the restrictions were reasonable in the context of economic legislation.

Conclusion: Sections 36(1)(viia) and 43D are constitutionally valid.

Final Conclusion: The Court held that an NBFC's provision for NPA under RBI Directions, 1998 is a prudential disclosure item, not a deductible write-off, and that the special tax benefits available to banks do not extend to NBFCs; the appeals therefore failed.

Ratio Decidendi: A prudential provision for non-performing assets mandated for disclosure under RBI directions is not, without an actual write-off or specific statutory allowance, deductible in computing taxable income under the Income-tax Act, 1961, and regulatory accounting treatment does not control taxability where the statutes operate in different fields.

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