NBFC NPA provisioning under RBI norms does not create a tax deduction, while later recoveries are treated as capital recovery.

RBI prudential norms may require an NBFC to provide for non-performing assets, but that regulatory provision does not by itself qualify as a deduction under the Income-tax Act because section 36(1)(vii) allows only bad debts actually written off and excludes mere provisions for doubtful debts. The statutory scheme also shows that the special deduction in section 36(1)(viia) was not extended to NBFCs. Where the original provision is disallowed, later recoveries of the NPAs are treated as recovery of capital in the first instance, so they are not taxed as income in the same manner as a section 41(4) recovery and corresponding relief applies in later-year computation.

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Issues: (i) Whether provision for non-performing assets debited to the profit and loss account by a non-banking financial company, in accordance with Reserve Bank of India prudential norms, is allowable as a deduction under the Income-tax Act, 1961. (ii) Whether, if such deduction is disallowed, the amount subsequently realised from the non-performing assets should be reduced from income in later years.

Issue (i): Whether provision for non-performing assets debited to the profit and loss account by a non-banking financial company, in accordance with Reserve Bank of India prudential norms, is allowable as a deduction under the Income-tax Act, 1961.

Analysis: The deduction was examined under section 36(1)(vii), which allows only bad debts written off as irrecoverable, and the Explanation specifically excludes any provision for bad and doubtful debts. The Reserve Bank of India directions under section 45JA of the Reserve Bank of India Act, 1934 require provisioning for non-performing assets for regulatory purposes, but those directions operate in a different field from computation of taxable income. Section 45Q gives overriding effect only where there is inconsistency, and no such inconsistency was found between the two enactments. The statutory scheme of section 36(1)(viia) shows that the legislature expressly granted deduction for specified institutions and did not extend that benefit to non-banking financial companies. The provision for non-performing assets was therefore treated as a provision for doubtful debts and not as a deductible bad debt write-off.

Conclusion: The deduction is not allowable, and the answer is against the assessee and in favour of Revenue.

Issue (ii): Whether, if such deduction is disallowed, the amount subsequently realised from the non-performing assets should be reduced from income in later years.

Analysis: Once the original provision is not allowed as a deduction, the subsequent recovery of the capital amount does not by itself assume the character of taxable income in the same manner as a recovery governed by section 41(4). The later realisation was held to be a recovery of capital in the first instance, and the assessee was entitled to corresponding relief in computation of subsequent years.

Conclusion: The assessee is entitled to relief to the extent that subsequent recoveries of the non-performing assets are not to be taxed as income in the manner suggested by the revenue position.

Final Conclusion: The regulatory provisioning requirement under the Reserve Bank of India framework does not override the specific deduction conditions under the Income-tax Act, but the tax treatment of subsequent recoveries must be adjusted consistently with the disallowance of the original provision.

Ratio Decidendi: A regulatory direction requiring provision for non-performing assets does not create an allowable deduction under the Income-tax Act unless the statutory conditions for a bad debt write-off are satisfied, and a non-banking financial company cannot claim section 36(1)(vii) deduction merely because the provision is mandatory under Reserve Bank of India norms.

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