RBI prudential norms cannot override income-tax accrual rules for NPA interest; software costs, NPA provisions and hire-purchase method changes were also rejected.

RBI prudential norms for NBFCs did not override the Income-tax Act, so interest on non-performing assets remained taxable on accrual basis under the mercantile system; the assessee could not invoke section 43D by implication. Depreciation linked to assets already deemed allowed under section 115J was disallowed, software acquisition was treated as capital expenditure, and the change from the sum-of-digits method to the internal rate of return method for hire-purchase income was rejected. Provision for NPAs and the alternative plea of deemed write-off were also denied because actual write-off was required. Sales-tax collected but not remitted was treated as a trading receipt, while higher depreciation on leased vehicles was allowed.

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Issues: (i) Whether interest on non-performing assets was taxable on accrual basis notwithstanding RBI prudential norms; (ii) whether depreciation was allowable in respect of assets for which depreciation had been deemed to have been allowed under section 115J; (iii) whether expenditure on purchase of software was revenue or capital in nature; (iv) whether the change in method of accounting for hire-purchase income from sum-of-digits method to internal rate of return method was permissible; (v) whether provision for non-performing assets and the alternative plea of deemed write-off were allowable; (vi) whether sales-tax collected but not remitted was a trading receipt; and (vii) whether higher depreciation on leased vehicles was allowable.

Issue (i): Whether interest on non-performing assets was taxable on accrual basis notwithstanding RBI prudential norms.

Analysis: The assessee, a non-banking finance company following the mercantile system, relied on RBI prudential norms and the concept of real income to contend that interest on sticky loans had not accrued. The Revenue relied on section 145 and the limited scope of RBI directions. The decision turned on the nature and field of operation of the two enactments, the purpose of RBI guidelines, and the fact that section 43D grants a specific statutory concession only to specified assessees. The view taken was that RBI guidelines regulate supervision and control of NBFCs, but they do not displace the mandatory scheme of computation of income under the Income-tax Act, and that the assessee could not claim the benefit of section 43D by implication.

Conclusion: The interest on non-performing assets was held taxable on accrual basis and the issue was decided against the assessee.

Issue (ii): Whether depreciation was allowable in respect of assets for which depreciation had been deemed to have been allowed under section 115J.

Analysis: The claim was examined in the light of the settled principle that where book-profit provisions operate, depreciation and other adjustments are still governed by the statutory mechanism for carry forward and set-off. The governing authority held that the earlier deemed allowance of depreciation affected the written down value computation and the assessee could not reopen the position as claimed.

Conclusion: The depreciation claim was disallowed and the issue was decided against the assessee.

Issue (iii): Whether expenditure on purchase of software was revenue or capital in nature.

Analysis: The software was acquired for use in the assessee's leasing business along with computer hardware. Applying the test of enduring advantage and the nature of the asset acquired, the software purchase was treated as resulting in an asset of capital character. The allowance of depreciation was left to follow the capital treatment.

Conclusion: The software expenditure was held to be capital in nature and the issue was decided against the assessee.

Issue (iv): Whether the change in method of accounting for hire-purchase income from sum-of-digits method to internal rate of return method was permissible.

Analysis: The issue was considered in the light of the recognised method for determining income from hire-purchase transactions and the prior special bench view relied upon in the order. The method adopted by the assessee was not accepted as the correct basis for computing taxable income in the facts of the case.

Conclusion: The change in method was rejected and the issue was decided against the assessee.

Issue (v): Whether provision for non-performing assets and the alternative plea of deemed write-off were allowable.

Analysis: The provision created in line with RBI norms was held not to satisfy the statutory requirement for deduction of bad debts, which requires actual write-off in the books. The alternative plea of deemed write-off was also rejected because the books did not reflect an actual write-off as required by the governing provision.

Conclusion: The claim for provision and the alternative plea of deemed write-off were rejected and the issue was decided against the assessee.

Issue (vi): Whether sales-tax collected but not remitted was a trading receipt.

Analysis: The amount was collected in the course of business and credited to a contingency account rather than remitted. The character of the receipt, and not the bookkeeping label, was treated as determinative. On that basis, the collected sales-tax was regarded as a trading receipt liable to tax.

Conclusion: The addition was restored and the issue was decided in favour of the Revenue.

Issue (vii): Whether higher depreciation on leased vehicles was allowable.

Analysis: The claim was governed by the jurisdictional precedent allowing the higher rate of depreciation on leased vehicles. The departmental challenge was therefore not accepted.

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

Final Conclusion: The assessee succeeded only on the depreciation on leased vehicles issue, while the Revenue succeeded on the principal disputes concerning taxability of NPA interest, deduction claims linked to NPAs, software expenditure, accounting method for hire-purchase income, and sales-tax collections.

Ratio Decidendi: RBI prudential norms issued for supervision and control of NBFCs do not override the mandatory computation provisions of the Income-tax Act, and income that has accrued under the mercantile system remains taxable unless a specific statutory provision grants a contrary treatment.

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