RBI prudential norms override accrual accounting for NPA income, while vehicle-use and bad-debt disallowances were upheld.

For a registered non-banking financial company, income recognition for non-performing assets is governed by RBI prudential norms under Chapter IIIB of the Reserve Bank of India Act, 1934, and section 45Q gives those directions overriding effect over inconsistent provisions of the Income-tax Act, 1961. Applying that principle, the Tribunal held that the mercantile accrual rule under section 145 could not be used to tax lease rentals, interest and bill discounting charges, so the additions were deleted. The disallowance of repairs and maintenance was sustained because personal use of vehicles was accepted. The bad debt claim was also rejected for want of sufficient evidence that the debts had actually become irrecoverable, particularly in transactions with a sister concern.

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Issues: (i) Whether the prudential norms issued under Chapter IIIB of the Reserve Bank of India Act, 1934 override section 145 of the Income-tax Act, 1961 for recognising income from non-performing assets of a non-banking financial company; (ii) whether disallowance of repairs and maintenance on account of personal use of vehicles was justified; (iii) whether the claim for bad debts written off was allowable.

Issue (i): Whether the prudential norms issued under Chapter IIIB of the Reserve Bank of India Act, 1934 override section 145 of the Income-tax Act, 1961 for recognising income from non-performing assets of a non-banking financial company.

Analysis: Chapter IIIB of the Reserve Bank of India Act, 1934 confers power on the Reserve Bank of India to issue directions on income recognition, accounting standards and provisioning for non-banking financial companies. Section 45Q gives that Chapter overriding effect over anything inconsistent contained in any other law. The assessee was granted registration as a non-banking financial company and the income in question was governed by the prudential norms. The Tribunal held that the Reserve Bank directions could not be ignored and that the additions made by applying the mercantile accrual concept under section 145 were not sustainable.

Conclusion: The issue was decided in favour of the assessee and the addition on account of lease rentals, interest and bill discounting charges was deleted.

Issue (ii): Whether disallowance of repairs and maintenance on account of personal use of vehicles was justified.

Analysis: The assessee accepted that the vehicles were used for personal purposes. On those facts, the disallowance made by the lower authorities was treated as justified.

Conclusion: The issue was decided against the assessee and the disallowance was sustained.

Issue (iii): Whether the claim for bad debts written off was allowable.

Analysis: The Tribunal found no sufficient evidence to show that the debts had in fact become bad, particularly where the transactions were with a sister concern and the surrounding facts did not support a genuine bad debt claim. The reasoning of the first appellate authority was accepted.

Conclusion: The issue was decided against the assessee and the disallowance was sustained.

Final Conclusion: The appeal succeeded only on the principal issue relating to recognition of income under the Reserve Bank of India Act, 1934, while the remaining disputed additions were upheld.

Ratio Decidendi: For a registered non-banking financial company, the specific mandate and overriding effect of Chapter IIIB of the Reserve Bank of India Act, 1934 require income recognition to be determined by RBI prudential norms where they are inconsistent with the general accrual rule under the Income-tax Act, 1961.

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