Estimated diminution and RBI-based provisions are not deductible beyond the Income-tax Act's statutory limits, Madras HC holds.

Diminution in the value of unlisted investments was not deductible because the shares were treated as capital investments, with any loss relevant only on sale and not on year-end revaluation. The provision for non-performing assets was also restricted to the statutory deduction available under section 36(1)(viia), and RBI norms could not enlarge the allowance beyond the Act. The claimed loss on repossessed vehicles was disallowed because it was only an estimated diminution, not a crystallised and legally allowable loss; on that basis, revision under section 263 was upheld as the assessment was erroneous and prejudicial to revenue.

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Issues: (i) Whether the assessee was entitled to deduction for diminution in the value of investments in two unlisted companies. (ii) Whether the provision made for non-performing assets was allowable as a deduction. (iii) Whether the loss claimed on diminution in the value of repossessed vehicles was an allowable deduction, and whether the revisionary jurisdiction under section 263 was rightly invoked.

Issue (i): Whether the assessee was entitled to deduction for diminution in the value of investments in two unlisted companies.

Analysis: The investment in unlisted shares was treated as a mere capital investment and not as stock-in-trade. The claim for deduction was examined on the footing that loss in value of such investments becomes relevant only on sale, and not on a mere year-end diminution. The Court also noted that the issue had been consistently decided against the assessee in earlier proceedings.

Conclusion: The deduction for diminution in the value of investments was not allowable and the issue was decided against the assessee.

Issue (ii): Whether the provision made for non-performing assets was allowable as a deduction.

Analysis: The assessee, being a non-banking financial company, sought deduction on the basis of RBI norms. The statutory scheme under section 36(1)(viia) was applied, under which only the prescribed provision for bad and doubtful debts is allowable within the statutory limit. The Court held that RBI guidelines do not enlarge the deduction beyond what the Act specifically permits.

Conclusion: The provision for non-performing assets was not fully deductible beyond the statutory limit and the issue was decided against the assessee.

Issue (iii): Whether the loss claimed on diminution in the value of repossessed vehicles was an allowable deduction, and whether the revisionary jurisdiction under section 263 was rightly invoked.

Analysis: The claimed reduction was treated as an estimated and notional diminution based on projected market value, not as a written-off bad debt. The Court held that deduction could not be claimed on a mere estimate of loss, especially when the actual loss would crystallise only on resale and no accounting standard was shown to permit such claim. On that footing, the assessment order was held to be erroneous and prejudicial to the interests of the revenue, justifying revision.

Conclusion: The claimed loss on repossessed vehicles was not allowable and the invocation of section 263 was upheld, both against the assessee.

Final Conclusion: The appeal failed on all substantive questions and the assessment revision and disallowances were sustained.

Ratio Decidendi: A mere provision or estimated diminution in value is not deductible unless the statute specifically allows it, and RBI norms cannot override the Income-tax Act; a claimed loss must be legally allowable and actually crystallised in accordance with the governing provisions.

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