ORDER

Per K.D. Ranjan, Accountant Member. - These cross appeals by the revenue and the assessee for the assessment year 1997-98 arise out of the order of CIT(A)-IX, Chennai.

2. First we will take up assessee's appeal in ITA No. 2021/Mds./2000. The first issue for consideration relates to recognition of income from non-performing assets. The facts of the case as apparent from record are that assessee is a non-banking financial company and recognised by Reserve Bank of India. The assessee is following mercantile system of accounting. During the course of assessment proceedings, the Assessing Officer found that assessee had not included income on Non-Performing Assets (NPAs), while computing the returned income. The assessee vide his letter dated 26-2-2000 stated that it was following prudential norms prescribed by the Reserve Bank of India and based on the guidelines issued by the Institute of Chartered Accountants of India and Reserve Bank of India, they have not recognised income in Profit & Loss Account in respect of non-performing assets. The Assessing Officer further noted that in earlier years similar disallowance was made which was confirmed by the Ld CIT. Accordingly, he added the amount of Rs. 1,30,78,653 being interest income on non-performing assets not credited to profit and loss account. On appeal, ld. CIT(A) confirmed the additions following his orders for earlier years.

3. Before us ld. AR of the assessee submitted that assessee is recognised as non-banking financial company by Reserve Bank of India. The prudential norms for recognition of income, contained in the guidelines issued by Reserve Bank of India are binding on the assessee. The prudential norms issued by Reserve Bank of India vide their letter dated 13-6-1994 lay down the conditions for income recognition and accounting standards to be followed by NBFCs. As per the guidelines, an asset becomes non-performing when it ceases to yield income at least for six months and from such non-performing assets the income may not be recognised merely on the basis of accrual. The income from NPAs, therefore, should be recognised only when it is actually received. Ld. AR further submitted that where there was no certainty of recovery of the principal amount being non-performing assets, the recognition of income thereon would not have been be proper. Therefore the reality of situation has to be considered while recognising the income from NPAs. Further the income on sticky loans would not be taxable in the hands of assessee in view of decision of Hon'ble Supreme Court in the case of Godhra Electricity Supply Co. Ltd. v. CIT [1997] 225 ITR 746 . The assessee is following Accounting Standard 9, according to which the income is to be recognised on receipt basis. He placed reliance on the decision of Madras High Court in the case of Commissioner Of Income-Tax v. Annamalai Finance Ltd. [2005] 275 ITR 451 , wherein their Lordships had at page 459 observed that the change of method of accounting of overdue charges from the mercantile basis to cash basis, method of accounting as followed by an assessee does not create any income but; the method of accounting only recognises income. Therefore, either to apply the accrual system or cash system, recognition of income is a paramount factor. He also placed reliance on Tribunal decision in the case of TCI Finance Ltd. v. Asstt. CIT [2004] 91 ITD 573 (Hyd.) , wherein it has been held that accounting policies mandated by Reserve Bank of India are not contrary to accounting standard notified by Central Government in pursuance to section 145(2) of the Act. The assessee is following the system of accounting from 1992-93 and since income has not accrued on sticky loans as per Reserve Bank of India guidelines, the same is not liable to be taxed.

4. He also placed reliance on the decision of ITAT Delhi Bench 'B' in the case of TEDCOInvestment & Financial Services (P.) Ltd. v. Dy. CIT [2003] 87 ITD 298 wherein it has been held (i) that provisions of Chapter III-B of RBI Act, 1934, override the provisions of section 145(2) of the Act because of non obstante clause appearing in section 45Q; (ii) that the Income-tax Act, 1961, is a General Act, whereas Reserve Bank of India Act is a Special Act; (iii) that it was not the case of the department that there was excess delegation of power. Therefore, the provisions of Reserve Bank of India Act would override the provisions of Income-tax Act.

5. He further submitted that in assessment years 1993-94 and 1994-95, Hon'ble Madras High Court has decided the case in favour of assessee. Since there is no change in method of accounting as compared to earlier years the assessee's case is covered by jurisdictional High Court. Therefore, assessee was justified in not recognising the income on NPAs.

6. Alternatively, it was argued that the amount advanced to various parties represents stock-in-trade (money) in the hands of the assessee. If the contention of the assessee is not accepted the amount of interest should be treated as deemed to have been written off in view of decision in Commissioner Of Income-Tax v. Srivinayaga Pictures [1986] 161 ITR 65 (Mad.) .

7. On the other hand Shri Shaji P. Jacob, Sr. Departmental Representative submitted that Reserve Bank of India Guidelines could not override the mandatory provision of section 145 of the Act. Referring to the legislative intention for inserting section 43D, he submitted that the Finance Act, 1991, inserted a special provision with effect from 1-4-1991, for recognition of income in case of a public financial institution, scheduled bank, State Financial Corporation, State Industrial Investment Corporation etc. Later on through the Finance Act, 1999, the benefit of this provision was extended to public companies engaged in providing long-term finances to housing projects as approved by National Housing Bank. Further he submitted that if the Guidelines issued by Reserve Bank of India could suo motu overrule, the specific provision of section 145 of Income-tax Act, 1961, there was no need of introducing section 43D by the Finance Act, 1991 and later on modify it by extending the benefit to some more class of assessees by the Finance Act, 1999. This exhibits the present situation under which Banks and public financial institutions take advantage of this provision with effect from 1-4-1991 and public companies engaged in providing long-term finances to housing projects with effect from 1-4-2000 through the Finance Act, 1999, whereas NBFCs take advantage of this provision without any Finance Act/amendment to Income-tax Act/any specific provision in the Income-tax Act to that effect. This is a clear anomaly and defeats the purpose of legislation.

8. He further submitted that section 145 is a specific provision which deals with the method of accounting for determining income of a particular year. Section 45Q of the Reserve Bank of India Act, being a general provision cannot override the specific provision. He relied on the decision of Hon'ble Supreme Court in the case of South India Corpn.(P.) Ltd. v. Secretary, Board of Revenue AIR 1964 SC 207 p. 215. Further compulsive provision will control a discretionary provision as held in Life Insurance Corpn. of India v. S.V. Oak AIR 1965 SC 975 p. 980. He further submitted that both Income-tax Act and Reserve Bank of India Act are Special Acts. There is no inconsistency/anomaly between Income-tax Act and Reserve Bank of India Act because both of them operate in different fields. Sometimes one finds two or more enactments operating in the same field and each containing a non obstante clause stating that its provisions will have effect "notwithstanding anything inconsistent therewith contained in any other law for time being in force". The conflict in such case is resolved on consideration of purpose and policy underlying the enactments and language used in them (Sarwan Singh v. Kasturilal AIR 1977 SC 265 pp. 274, 275; Ashoka Marketing Ltd. v. Punjab National Bank AIR 1991 SC 855 pp. 878, 879). Section 145 introduced by Finance Act, 1995 and Reserve Bank of India Guidelines were issued on 9-1-1997 which as far as the recognition of taxable income in the hands of NBFC is concerned, amounts to repeal of earlier Act by implication. This is against the article 143 of Constitution of India. Repeal, express or implied, cannot be delegated either by the Parliament or by State Legislature (Article 143 of the Constitution of India and Delhi Laws Act, 1912, In re AIR 1951 SC 332).

9. Another argument put forward by Shri P. Jacob is that the mandatory provisions cannot be overruled by Reserve Bank of India Guidelines. Section 145 uses the word 'shall' which mandates the method of accounting for all taxable entities in the country whereas Reserve Bank of India issue only guidelines which are directory in nature. If a provision is mandatory, an act done in breach thereof will be invalid, but if directory, the act will be valid although non-compliance may give rise to some other penalty if provided by the Statute (Rani Drigraj Kuer v. Raja Sri Amar Krishna Narain Singh AIR 1960 SC 444 pp. 449, 451; Union of India v. Tulsiram Patel AIR 1985 SC 1416). Ld DR further drew our attention to the preamble of Reserve Bank of India Act, 1934 which reads as under :

"whereas it is an expedient to constitute a Reserve Bank of India to regulate the issue of the bank notes and keeping of the reserve with a view to securing monitary stability in (India) and generally to operate the currency and credit system of the country to its advantage".

Thus he submitted that the introducing of Reserve Bank of India Act was never to determine the taxable income of any entity in the country for which a self-contained code by itself i.e., Income-tax Act, 1922 was in place. The heading given in section 45JA is "Power of bank to determine policies and issue direction". Further heading of Chapter III-B of Reserve Bank of India Act, which contains this section, is "Provision relating to Non-Banking Institutions recurring deposits and Financial Institutions". He therefore submitted that the contents of this section have to be restricted to this extent. Reserve Bank of India Guidelines can only formulate policy of NBFC and to control its functions. The bank may issue directions in the public interest or regulate the financial system of the country to its advantage. It cannot determine the extent of taxable income as per Income-tax Act. The heading is akin to preamble. It specifies the context in which the contents thereunder refer. It throws light to the design and the intent of the legislation.

10. He further submitted that the principle of "casus omissus" cannot be applied to provision of section 43D to allow benefit of recognition of income. There is no scope for imposing into the statute the words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be "casus omissus", the effect can be remedied only by the legislation not by financial interpretation. The intention of the Legislature is to be primarily gathered from the words used in the statute. Once it is shown that the case by the assessee comes within the letter of law, he must be taxed, however, great the hardship may appear to the judicial mind to be. He relied on the following decisions to support his view.

Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) ;

CWT v. K.S. Vaidyanathan [1985] 153 ITR 11 (Mad.) ;

Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC);

Asstt. CIT v. Velliappa Textiles Ltd. [2003] 263 ITR 550 (SC) ;

Prakash Nath Khanna v. CIT [2004] 266 ITR 1 (SC) .

He further submitted that fiscal statutes ought to be strictly construed does not rule out the application of principles of reasonable construction to give effect to the purpose or intention of any particular provision as apparent from scheme of the Act. In support of his contention he placed reliance on the decision of Hon'ble Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 . Further relying on the decision of Hon'ble Supreme Court in the case of C.W.S (India) Limited v. Commissioner Of Income Tax. [1994] 208 ITR 649 he submitted that the object of all the rules of interpretation is to give effect to the object of the enactment having regard to the language used. Where a literal interpretation leads to absurd or unintended result, the language of the statute can be modified to accord with the intention of Parliament to avoid absurdity. He also placed reliance on the decisions of Hon'ble Supreme Court in the cases of Commissioner Of Income Tax, Bangalore v. J.H Gotla, Yadagiri. [1985] 156 ITR 323 ; K.P. Varghese v. ITO [1981] 131 ITR 597 wherein it had been observed that the purpose for which a statute is enacted is relevant.

11. Ld. DR replying to the reliance placed by the Ld. AR of the assessee on the decision of the various ITAT submitted that in the case of TEDCO Investment & Financial Services (P.) Ltd. (supra) submitted that in this case Tribunal went by the presumption that Income-tax Act is a General Act and RBI Act being a Special Act, will override the provisions of General Act i.e., Income-tax Act. Since this presumption itself is wrong, the whole basis of order and the analysis on the basis of such mistaken assumption is against law. Another reasoning in this order is that the assessee did not obtain Registration from RBI as a NBFC when the Assessing Officer and CIT(A) considered the assessment and appeal and since it has obtained the registration by the time ITAT took up the matter, Tribunal held that the findings/reasoning of Assessing Officer and CIT(A) were not correct. This situation does not exist here and thus the decision is distinguishable. Further, in this order Tribunal relied on the decision in Overseas Sanmar Financial Ltd. v. Jt. CIT [2003] 86 ITD 602 (Chennai) which pertains to assessment years 1995-96 and 1996-97 and are prior to amendment to section 145 deleting the hybrid system of accounting. In the case of Overseas Sanmar Financial Ltd. (supra) the Tribunal went by the reasoning that since RBI and Income-tax Department are both part of the same Finance Ministry of India, the Guidelines issued by RBI are binding on Income-tax Department. ITAT never went into the crucial issue as to whether the Guidelines issued by RBI being delegated legislation, can overrule express provisions of the Act i.e., section 145 of Income-tax Act. Further, this decision pertains to assessment years 1995-96 and 1996-97 i.e., prior to amendment to section 145 deleting hybrid system of accounting.

12. He further placed relevance on the decision in the case of Bank of RajasthanLtd. v. IAC [1999] 68 ITD 69 , wherein ITAT, Bench Jaipur observed as under :

"The Income-tax Act, 1961, is an independent code in itself. Total income or loss to be computed has to be in accordance with the provisions of the Income-tax Act. Procedure to be followed for completion of assessment and the total income to be computed has been elaborately certified in the Income-tax Act itself. We are, therefore, of the conformed opinion that for computation of total income under the Income-tax Act, norms and/or the procedure laid down by the RBI cannot be followed under the Income-tax Act. The norms and various procedures prescribed by the RBI to its subsidiary or scheduled banks is in order to regulate effectively conduct the business and to control the mandatory aspect of the company."

Also submitted that in the case of Dy. CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD 17 (ITAT, SB - Hyd.) held as under:

"The term 'accrual' of income used in the Companies Act, as explained in the various Accounting Standards and as understood for the purposes of taxation laws in certain circumstances may have different meanings depending on the purpose of legislation, the context in which such expression has been used and on the interpretation of the terms of relevant contracts. For tax purposes, the accrual or receipt of income in the relevant previous year will have to be determined in consonance with the ambit of taxable income as per section 5 of the Act on the basis of a careful scrutiny of the terms of contract for hire-purchase and lease agreements regardless of the method of accounting followed by the assessee for recognition of such income on its books of account."

He also relied on the unreported decisions of Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. v. Jt. CIT [2006] 280 ITR 491 and in the case of Southern Technologies Ltd. v. Joint Commissioner Of Income-Tax. No. 1 of 2002, dated 23-1-2002] wherein Hon'ble Jurisdictional High Court upheld the findings of CIT(A) to the extent that RBI directions cannot override the mandatory provisions of the Income-tax Act.

13. We have heard both the parties and perused the records. The assessee is a Non-Banking Finance Company and is required to follow the prudential norms issued by Reserve Bank of India. In view of Reserve Bank of India norms, the argument of ld. AR of the assessee, Shri Vijayaraghavan is that assessee being NBFC is bound to follow Reserve Bank of India Guidelines for income recognition. The interest income on NPAs is to be recognised on receipt basis and not on accrual basis. Whereas according to ld. DR Shri Shaji Jacob, section 145 of Income-tax Act, being specific provision would override provisions of section 45Q of Reserve Bank of India Act.

14. In order to decide the issue whether RBI Guidelines would override income-tax provisions or not, we have to go through the reasons for issue of RBI Guidelines. Reserve Bank of India issued prudential norms for income recognition, transparency of accounts, provisioning for bad and doubtful debts etc., vide letter dated 13-6-1994. These guidelines were issued on the recommendations of working group on financial companies (Shah Working Group). Section 45JA of Reserve Bank of India Act was inserted by Act 23 of 1997 with retrospective effect from 9-1-1997 [The President of India promulgated the Reserve Bank of India (Amendment) Ordinance 1997, on 9-1-1997 as Parliament was not in session]. Reserve Bank of India issued prudential norms vide notification No. DFC 119/DG/(SPT)-98, dated 31-1-1998. This Notification replaced earlier Notification No. DFC 115/DG(SPT)/98, dated 2-1-1998. Prior to notification dated 2-1-1998, Guidelines issued by Reserve Bank of India vide letter dated 13-6-1994 based on recommendations of Shah Working Group on Financial Companies was in existence. Therefore, for assessment year 1997-98 which is under consideration guidelines issued under section 45JA are not applicable because they came into operation on 2-1-1998. As per the Guidelines of Reserve Bank of India dated 13-6-1994, Non-Performing Asset (NPA) is an asset in respect of which interest has remained unpaid and has become 'past due'. An amount is to be treated as 'past due' when it remains unpaid for 30 days beyond the due date. The interest on NPAs should not be booked as income if such interest has remained outstanding for more than six months on and from 31-3-1995. Reserve Bank of India Guidelines also prescribes norms for identification as bad and doubtful and writing of in the books of account. Classifications of assets as per Reserve Bank of India Guidelines are as under :

(a) Standard assets - Assets in respect of no default in payment of principal or payment of interest is perceived which does not disclose any problems nor carry more than normal risk attached to the business.
(b) Sub-standard assets - Sub-standard asset is one when has been classified as NPA for a period not exceeding two years. Term loans where interest and or instalments of principal are over due for six months as on 31-3-1995 should be treated as sub-standard.
(c) Doubtful debt - A doubtful asset is one which has remained NPA for a period exceeding two years. Term loans where instalments of principal have remained overdue for a period exceeding two years should be treated as doubtful.
(d) Loss assets - An asset which is considered uncollectible although there may be some salvage value or recovery value.

Reserve Bank of India Guidelines also prescribed guidelines for provisioning of bad and doubtful debts as under :

(i) Loss assets - The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 per cent of the outstanding should be provided for.
(ii) Doubtful debts - ( a ) 100 per cent of provision to the extent of which the advance is not covered by the reasonable value of the security to which NBFC has a valid recourse should be made. The realisable value is to be estimated on a realistic basis.

(b) Over and above item ( a) above, depending upon the period for which the asset has remained doubtful, provision to the extent 20 per cent to 50 per cent of the secured portion ( i.e., estimated realisable value of the outstanding should be made on the following basis :

(iii) Sub-standard assets - A general provision of 10 per cent of total outstanding should be made.

Guidelines issued under section 45JA are also identical to the guidelines mentioned above. From the guidelines issued it is apparent that they were issued to supervise and exercise the control on NBFCs and not to recognise income or make provisions for bad and doubtful debts for the purposes of income-tax.

15. Chapter III-B containing the provisions relating to NBFCs was inserted in the Reserve Bank of India Act, 1934 by Amendment Act 55 of 1963 - Statement of objects and reasons read as under:

"The existing enactments relating to banks do not provide for any control over companies or institutions which although they are not treated as banks, accept deposits from the general public or carry on other business which is allied to banking. For ensuring more effective supervisions and management of the monetary and credit system by the Reserve Bank, it is desirable that the Reserve Bank should be enabled to regulate the conditions on which deposits may be accepted by these non-banking companies or institutions. The Reserve Bank should also be empowered to give to any financial institution or institutions directions in respect of matters, in which the Reserve Bank as the Central Banking Institution of the economy may be interested from the point of view of control of the credit policy. The Reserve Bank powers in relation to commercial banks should also be enhanced and extended in certain directions, so as to provide for stricter supervision of the operations and working of such banks. The Bill seeks to achieve these objectives."

Section 45JA was inserted by Amendment Act 23 of 1997 -Statement of objects and reasons read as under :

"The activities of the non-banking institutions and unincorporated bodies receiving deposits are regulated in terms of the provisions of Chapters III-B and III-C of the Reserve Bank of India Act, 1934, respectively. Until recently the emphasis was on regulating the receipt of deposits by Non-Banking Finance Companies (NBFCs) as an adjunct to credit and monetary policies and to provide indirect protection to depositors. However, experience has shown that the provisions were neither sufficient to regulate the business activities of these companies or do they provide adequate protection to depositors.

The Joint Parliamentary Committee which enquired into the irregularities in securities and banking transactions had recommended that the Government should examine whether the legislative framework for regulating NBFCs is sufficiently wide. The Working Group on Financial Companies appointed by Reserve Bank of India (RBI) under the Chairmanship of Dr. A.C. Shah had suggested regulatory and control measures to ensure the healthy growth and operations of these companies.

Despite the [provisions before the promulgation of the Reserve Bank of India (Amendment) Ordinance, 1997] contained in Chapter III-C of the Reserve Bank of India Act, the unincorporated bodies circumvented the statutory restrictions by floating different partnership firms as and when a firm reached the level of 250 depositors. Further, it is reported that several unincorporated bodies were advertising aggressively through various media soliciting deposits from public by offering high rates of interest and other incentives.

The Reserve Bank of India (Amendment) Ordinance, 1997, further to amend the Reserve Bank of India Act, provides several safeguards for the NBFCs so as to ensure their viability. These include compulsory registration of the NBFCs with Reserve Bank of India (RBI), stipulation of minimum net owned funds requirement, creation of reserve fund and transfer of certain percentage of profits every year to the fund and prescription of liquidity requirement. RBI has also been vested with powers to issue guidelines encompassing aspects such as income recognition, accounting standards, provision for bad and doubtful debts, capital adequacy, etc., which are intended to ensure sound and healthy operations and the quality of assets of these companies. RBI is also being empowered to issue directions to the auditors of NBFCs, to order special audit of NBFCs, prohibit acceptance of deposits by NBFCs, and to make application for winding up of NBFCs. Whereas earlier the only recourse available to the depositor was to approach to Court of Law for redressal of grievances, powers have been vested with the Company Law Board for directing the defaulting NBFCs to make repayment of the deposits/interest with a view to protect the interests of the depositors.

The un-incorporated bodies have been totally prohibited from accepting deposits for the purpose other than for personal use. They have been permitted to continue to take deposits after incorporating themselves within the regulatory framework. The un-incorporated bodies have also been specifically prohibited from issuing any advertisements in any form.

There are reports of several finance companies and un-incorporated bodies having failed to repay the deposits collected from unsuspecting depositors who have been tempted by the attractive returns and incentives offered. Concern has been expressed in several quarters on the need to take urgent steps to regulate the activities of such companies and un-incorporated bodies."

16. The plain reading of statement of objects and reasons for insertion of Chapter III-B relating to NBFCs and section 45JA makes it clear that the legislative intention was for effective supervision and management of the monetary and credit system by the Reserve Bank of India. Having dealt with the legislative intention of inserting Chapter XIII-B and section 45JA relating to NBFCs in the RBI Act, 1934, the issue to be decided is whether there is any inconsistency between section 145 of the Income-tax Act and Guidelines issued by Reserve Bank of India. In other words whether due to non obstante clause in section 45Q of Reserve Bank of India Act, 1934, the Guidelines issued by Reserve Bank of India Act, 1934, shall override the provision of section 145 of the Income-tax Act. In order to determine this issue we have to examine :—

(a) The nature of Income-tax Act and Reserve Bank of India Act, whether Special Act or General Act.
(b) Whether they operate in the same field.
(c) If there is any inconsistency, how to resolve the same.

17. The classification of a statute whether a General statute or a Special statute has to be made with reference to the context in each case and the subject-matter dealt with by each statute. As Justice Ramesan has pointed out in Gunepally Thammayya v. Rajah Tyadapasupati Khandendu Dora AIR 1930 Mad. 963, most Acts can be classed as General Acts from one point of view and Special Act from another. For example it may be argued as he says that the Contract Act which is applicable to all is general in relation to the Labour Act which is limited to the relationship of the employer and employees; and in another sense the Labour Act which applies to all concerned will be general in relation to labour employed in concerns engaged in supplies as essentials. A 'General Act' prima facie, is that which applies to whole community. In the natural meaning of the term it means an Act of Parliament which is unlimited both in its area and as regards the individual, in its effects. A special law must be taken as extensive in the subject it enacts. Therefore, Income-tax Act is a Special Act which is a code in itself with regard to chargeability of income to tax, collection and recovery, appellate procedures, penalties and prosecutions etc., whereas RBI Act which deals with the monetary system of the country is general in relation to the Income-tax Act. The Reserve Bank of India Act is Special Act, for purpose of banking regulations and the Income-tax Act is General Act with reference banking activities. Thus sections 5 and 145 of the Act which define the scope of the income and computation of the income are special provisions for taxation purposes with relation to RBI guidelines.

18. We in foregoing paragraphs have discussed the legislative intention of inserting Chapter XIII-B relating to NBFCs in the RBI Act, 1934. Section 45JA was also inserted with effect from 9-1-1997 for effective supervision and management of the monetary and credit system of the country. The preamble and heading are akin. Both the preamble to RBI Act, 1934 and heading to Chapter III-B and section 45JA specify the field to which they relate. Whereas the preamble to RBI Act defines the role of RBI for the purpose of issue of bank notes, keeping of the reserve with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. Heading to section 45JA suggests that purpose of insertion of section 45JA was to empower the bank to determine policies and issue directions relating to NBFCs. Heading to Chapter III-B also suggests the purpose or objectives to be achieved. Thus from the preamble and headings it can be made out that RBI Act operates in the field of monetary and credit system of the country. It was never intended for recognition of income for the purposes of Income-tax Act. Thus both the Reserve Bank of India Act and Income-tax Act operate in different fields and they stand for different and distinct purposes. In the case of Damodaran v. State AIR 1960 Ker. 58, 60 Hon'ble Kerala High Court observed that when the purposes intended to be served are distinct and different and the two provisions can very well stand together whatever be their validity, there is no disharmony between them, and therefore, no scope for applying the principles of harmonious construction. Both the Income-tax Act and the RBI Act operate in different fields without disobeying each other, can stand together. Hence there can be no inconsistency in the provisions. The question of harmonious construction of the provisions would arise when the provisions operates in the same field.

19. As per Reserve Bank of India Act, the income on NPAs is not to be credited to profit and loss account. In case of an asset if interest is not received for six months it is to be treated as NPA The assessee had not credited income to profit and loss account following Reserve Bank of India Guidelines. As we have already held that Reserve Bank of India Guidelines are for the purpose of supervision, management and control of monetary and credit system it would not stop accrual of income under section 5 of the Income-tax Act. If Reserve Bank of India Guidelines were to stop the accrual of income under section 5 of the Act, it would have mentioned so. Thus Reserve Bank of India Guidelines dated 13-6-1994 or issued subsequently under section 45JA cannot override Income-tax Act which is a Special Act and Reserve Bank of India is General Act in relation to Income-tax Act.

20. We would like to mention that prior to insertion of section 43D with effect from 1-4-1991, recognition of income was on the basis of Circular of 9-10-1984. It said that for first three years the income may be taken on accrual basis and from 4th year onwards, the income in respect of doubtful debts was to be recognised on receipt basis. This principle was approved by Hon'ble Supreme Court in the case of Uco Bank, Calcutta v. Commissioner Of Income Tax, W.B [1999] 237 ITR 889 . Since the income was to be assessed for first three years on accrual basis provisions of section 43D were inserted in the Act. Circular No. 621, dated 19-12-1991 gives the legislative intention stating that section 43D was inserted with a view to improving the viability of banks, public financial institutions etc. so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or credited to the profit and loss account. This benefit was extended with effect from 1-4-2000 in the case of public companies engaged in long-term financing of housing projects approved by National Housing Bank. Legislature in their wisdom did not extend the same benefit to NBFCs which has been given to scheduled banks, public financial institutions etc. The provisions of section 43D as stood at relevant time (for assessment year 1997-98) had expression "the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts". This expression continues to exist in the newly substituted section 43D applicable with effect from 1-4-2000. This shows that the Reserve Bank of India Guidelines in respect of scheduled banks, public financial institutions etc. were not sufficient for recognition of income on cash basis for the purposes of Income-tax. The income of such assessees was determined as per Circular dated 9-10-1984. Because of this reason section 43D was inserted in the statute. Reserve Bank of India Guidelines in case of NBFC are for the purpose of control and supervision with respect to public interest and viability of the NBFC. The guidelines never intended for taking the interest income accrued as per section 5 of the Act out of the scope of Income-tax Act. If the contention of assessee is accepted, it would amount to insertion of "NBFC" in section 43D of the Act, that too by a guideline issued for different purposes by an authority other than Parliament. In other words the doctrine of "Casus Omissus" will deem to have been applied which is contrary to law of land as propounded by the Hon'ble Supreme Court in the cases relied upon the Ld. DR.

(i) Smt. Tarulata Shyam's case ( supra)
(ii) K.S. Vaidhyanathan's case ( supra)
(iii) Padmasundara Rao's case ( supra)
(iv) Velliappa Textile Ltd.'s case ( supra)
(v) Prakash Nath Khanna's case ( supra)

From the above discussion, it is clear that Reserve Bank of India guidelines alone are not sufficient for recognition of income on cash basis for the purpose of income-tax. There has to be a provision similar to section 43D in case of NBFCs also.

21. The next contention of the assessee is that it has not recognised income as there was no certainty of recovery of interest when principal amount was doubtful of recovery. The assessee is engaged in the business of money lending. When the principal amount becomes bad, such amount along with interest can be written off as bad debts in the books of account and assessee can claim deduction under section 36(1)(vii) of the Act. This contention of the assessee is not acceptable.

22. The next argument of Shri Vijayaraghavan, the ld. AR of assessee is that the Reserve Bank of India guidelines are identical to the regulations made under the Sick Industrial Companies (Special Provisions) Act, 1985 ('SICA'). According to Ld. AR the decisions taken under the guidelines issued under SICA are binding on all authorities and they override the provisions of Income-tax Act also. We have gone through the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. Under section 19 read with regulation 34, a scheme providing for financial assistance to the sick industrial company by way of loan, advances, guarantees, reliefs, concessions or sacrifices from the Central Government, State Government, any Scheduled or other Bank, a public financial institution or State level institution or any institution or other authority shall be sanctioned by the Board with the consent of the Government, Bank, Institution or other authorities. Sub-rule (2) provides that the Board (BIFR) shall circulate to every concerned person required by the scheme to give his consent within the stipulated time. In a case, where consent of a person is not received the Board may adopt other measures including winding up of the industrial company. The Act also provides for appeal in a case someone is aggrieved. Thus from plain reading of the provisions of SICA, it is clear that the concessions or sacrifices required by the Government or any other person are related to the rehabilitation of the sick company and the concerned persons are given opportunity to give their consent. Whereas Reserve Bank of India Guidelines have been issued for the purpose of monitoring the financial and credit system and also to watch the interest of public and also safeguard the viability of NBFCs. Under RBI Guidelines, opportunity is not given to the income-tax authorities for the simple reason that such guidelines are not intended to regulate Income-tax laws. Under SICA once a scheme is approved with the consent of Income-tax Department, recovery of tax demand cannot be affected. However it does not stop the determination of a tax liability. Therefore, two schemes under SICA and RBI Act are not comparable. The assessee fails on this count also.

23. The next argument of ld. AR is that assessee has been following system of accounting continuously under which the interest income on NPAs was not recognised. In assessee's own case Hon'ble Madras High Court has upheld the claim of the assessee for earlier assessment years vide TC Nos. 774 and 349 of 2004. In this regard it is worth noting that from assessment year 1997-98 and onward, an assessee has to follow either the mercantile or cash system of accounting. The assessment year in which Hon'ble Madras High Court has decided the matter in favour of assessee pertains to prior to assessment year 1997-98, where assessee could follow hybrid system of accounting. Therefore, the decision of Hon'ble Madras High Court in assessee's own case will not be applicable for assessment year 1997-98. Admittedly the assessee is following mercantile system of accounting and therefore assessee was required to credit the income accrued on non-performing assets to profit and loss account. Accordingly, we do not find any force in the submission of the ld. AR of the assessee.

24. Further it has been submitted that when there was uncertainty of recovery, the concept of real income is to be applied and therefore, no income has accrued to the assessee in view of decision of Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. (supra). This contention of assessee cannot be accepted. Hon'ble Supreme Court in the case of United Commercial Bank v. CIT [1999] 240 ITR 355 held that the concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognised limits. Reserve Bank of India has issued guidelines not only in the case of NBFCs but also in the case of banks. The banks were crediting the interest on bad and doubtful debts to sticky loan accounts but the interest accrued on such assets was not credited to profit and loss account. Prior to insertion of section 43D, such interest was assessed to tax as required by Circular dated 9-10-1984. Since the assessee is following mercantile system of accounting, the interest has accrued on NPAs. Merely because RBI has issued Guidelines, it will not be proper to hold that interest has not accrued.

25. Ld. AR also submitted that the decision of Hon'ble Madras High Court relied upon by the revenue in the case of TN Power Finance and Infrastructure Development Corpn. Ltd. (supra ) is not direct on the issue and therefore will not be applicable to the facts of the assessee's case. In this case Hon'ble Madras High Court has held that Reserve Bank of India Guidelines cannot override the mandatory provisions of Income-tax Act. The ratio of this decision is squarely applicable in respect of mandatory provisions of section 145 of the Act. We are unable to accept this proposition. We are also unable to agree with him that Reserve Bank of India Guidelines are in line with accounting standards issued under section 145(2) of the Act. The accounting standard recognises the income either on receipt basis or on mercantile basis regularly employed by the assessee. If Reserve Bank of India Guidelines are accepted it would result into hybrid system of accounting which is not permissible after 1-4-1997.

26. Further regarding the issue raised by ld. DR on delegated legislation, it has been submitted by Shri Vijayaraghavan, the ld. AR of the assessee that both the Acts are by Parliament and therefore it is incorrect on the part of revenue to say that Reserve Bank of India Guidelines will not override the Income-tax Act. Ld. DR on the other hand submitted that if the contention of ld. AR is accepted it would amount to amendment of Income-tax Act by an authority other than Parliament and is against the provisions of article 143 of the Constitution. Under article 143 of Constitution, it is a settled law that Parliament cannot abdicate or delegate its legislative functions to outside authority. In view of foregoing discussions, we are in agreement with the submissions made by ld. DR that Reserve Bank of India Guidelines cannot override the law made by the Parliament. Assessee has also placed reliance on the decision of ITAT Delhi Bench 'B' in the case of TEDCO Investment & Financial Services (P.) Ltd. (supra), wherein it has been held that Income-tax Act is a General Act and RBI Act is a Special Act. We after examination of the nature and field of operation of both the Acts have held that the Income-tax Act is a Special Act and RBI is a General Act. Thus the guidelines issued under section 45JA of the RBI Act are general to be followed by NBFCs. Moreover, the Tribunal has relied on the decision of ITAT Chennai in the case of Overseas Sanmar Financial Ltd. (supra) which relates to assessment years 1995-96 and 1996-97, i.e. prior to amendment of section 145 deleting hybrid system of accounting. In this case ITAT never went into the crucial issue as to whether the Guidelines issued by RBI being delegated legislation, can overrule express provisions of the Act, i.e., section 145 of Income-tax Act. Thus the decisions of ITAT relied by the assessee are distinguishable.

27. Under Income-tax Act income is to assessed as per provisions of section 5 and section 145. Provisions of section 145 are read as under :

"145. (1) Income chargeable under the head, "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessee or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144."

28. Sub-section (1) contains word "shall" which suggest that the provisions of section 145 are mandatory in nature. According to section 145 with effect from 1-4-1997 income of the assessee shall be computed either on cash or on mercantile system of accounting regularly employed by the assessee. It cannot be on mixed system of accounting.

Further section 5 of the Act defines the scope of total income which reads as under :

"5. (1) subject to the provisions of the Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year;
(c) accrues or arises to him outside India during such year :

Provided that, in case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled by in or a profession set up in India.

The combined reading of provisions of sections 5 and 145 of the Act shows that the total income of an assessee shall include the income on the basis of system of accounting regularly employed by him. Section 5 of the Act is enabling provision whereas section 145 is machinery section, which provides the method of computation of income under the head "Profits and gains of business or profession" or "Income from other sources". Section 145 of the Act is not only for the purposes of recognition of income but also provide for the method of computation of income under the specified heads. Therefore, the total income of an assessee which has been either received or accrued shall be computed in accordance with the provisions of section 145 of the Act. Accounting Standards I & II under sub-section (2) of section 145 of the Act, have been issued in consultation with the Institute of Chartered Accountants of India. Therefore, once income which has accrued shall be included in total income. The assessee cannot postpone the income on receipt basis except in the cases of assessee covered by the provision of section 43D of the Act. This view is supported by the decision of Special Bench in the case of Nagarjuna Investment Trust Ltd. (supra) wherein it has been held that :

"The term "accrual" of income used in the Companies Act, as explained in the various Accounting Standards and as understood for the purposes of taxation laws in certain circumstances may have different meanings depending on the purpose of legislation, the context in which such expression has been used and on the interpretation of the terms of relevant contracts. For tax purposes, the accrual or receipt of income in the relevant previous year will have to be determined in consonance with the ambit of taxable income as per section 5 of the Act on the basis of a careful scrutiny of the terms of contract for hire-purchase and lease agreements regardless of the method of accounting followed by the assessee for recognition of such income on its books of account."

29. We may also like to say that the guidelines issued by RBI are for identification of assets. No bank advances money unless adequate security and guarantee is obtained at the time of advancing of the loan. The guidelines also prescribe for making provision for bad and doubtful debts. Such provisioning made by the assessee is not allowable as deduction under section 36(1)(vii) of the Act because of express words of Explanation to the section. Hon'ble Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. (supra ) has held that merely because the Reserve Bank of India had directed the assessee to provide for non-performing assets, that direction could not override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia) which stipulate a deduction not exceeding 5 per cent of total income only in respect of the provision for bad and doubtful debts, which are predominantly revenue in nature or trade related and not for provision for non-performing assets, which are of predominately capital nature. If the ratio of decision of Hon'ble jurisdictional High Court is applied to the facts of the case, the provisions of section 145 being manda-tory in nature cannot be overridden by the Reserve Bank of India Guidelines. For a moment, if it is considered that Reserve Bank of India Guidelines would override the provisions of the Income-tax Act, then in that situation the accrual of income taken place as per provisions of section 5 of the Income-tax Act and for the purpose of computation of income, the Assessing Officer will have to refer to Reserve Bank of India Guidelines. Such a conclusion will be not only absurd but against all principles of law.

30. From above discussion it is clear that the Income-tax Act, 1961 is a Special Act. Reserve Bank of India Guidelines have been issued under delegated legislation for the purpose of effective supervision and control of monetary and credit system. The Reserve Bank of India Guidelines have not been issued to override the mandatory provisions of section 145 of the Act. This view is supported by the decision of Hon'ble Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. (supra ), wherein it has been held that Reserve Bank of India Guidelines cannot override the mandatory provisions of section 36(1)(viia) of the Act. In view of above discussions and the decision of Hon'ble Madras High Court, it is held that RBI Guidelines will not override the mandatory provisions of section 145 of the Act. Since the assessee is following mercantile system of accounting, the interest income on NPAs will be assessed to tax on accrual basis.

31. The alternative argument of ld. AR of the assessee is that if the contention of the assessee for recognition of income on receipt basis is not accepted, the amount of interest should be treated to have been written off. We are unable to accept this plea on the ground that for claiming deduction under section 36(1)(vii) the assessee has to actually write off a bad debt in the books of account, in view of decision of Hon'ble Madras High Court in the case of Commissioner Of Income-Tax v. Micromax Systems P. Ltd. [2005] 277 ITR 409 .

32. The next issue for consideration relates to depreciation deemed to have been allowed in the years in which income was computed under section 115J of the Act. The contention of assessee is that the WDV of assets for the purpose of depreciation remains undiminished by any depreciation not actually allowed within the meaning of section 43(6) and therefore assessee's claim for depreciation amounting to Rs. 13,25,18,600 is allowable. We find that this issue is covered by the decision of Hon'ble Supreme Court in the case of Karnataka Small Scale Industries Development Corpn. Ltd. v. CIT [2002] 258 ITR 770 , wherein it has been held that even where the book profit liability is imposed, the amounts of business loss, unabsorbed depreciation, investment allowance etc., at the beginning of the accounting year are to be adjusted and set off to the same extent of such brought forward losses, unabsorbed depreciation, etc., as they would have been adjusted or set off had the assessee been assessed to tax in the regular way in accordance with provisions of sections 28 to 43 of the Act, and only the resultant amount of loss, unabsorbed depreciation, etc., can be carried forward to the next year. The Supreme Court further observed that all that section 115J(2) does is to preserve the right to carry forward the balance of the unabsorbed loss and unabsorbed depreciation in the relevant previous year to next year. Respectfully following the decision of Hon'ble Supreme Court, the issue is decided against the assessee and in favour of revenue. Accordingly the order passed by ld. CIT(A) is upheld on this issue.

33. The next issue for consideration relates to expenditure for purchase of software claimed as revenue expenditure. The Assessing Officer found that the assessee purchased software and used in the business of leasing and claimed the same as revenue expenditure. The claim as revenue expenditure was made on the ground that the software does not last long. The contention of assessee was rejected by Assessing Officer on the ground that an asset of enduring nature came into existence and therefore the same was in nature of capital expenditure. The claim of the assessee was also rejected by ld. CIT(A) on the ground that the assessee leased out software along with hardware concerned and since the assessee had received lease rentals in the lease period for such composite lease of hardware and software, the Assessing Officer was correct in disallowing expenditure as capital in nature. He however, directed the Assessing Officer to allow depreciation on software as forming part of computer and its accessories. Before us, the assessee has submitted that the life of softwares is not for a long period and therefore no asset of enduring nature has come into existence. On the other hand ld. DR relying on the decision of Hon'ble Rajasthan High Court in the case of Commissioner Of Income-Tax v. Arawali Constructions Co. (P.) Ltd. [2003] 259 ITR 30 , Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 ITAT Delhi. The Jt. CIT v. Company Law Institute [IT Appeal No. 1752 (Mad.) of 2000] submitted that purchase of software was a capital expenditure.

34. We have heard both the parties. In this case the assessee has leased out computer along with software. The life of software is not short as held in the case of Arawali Constructions Co. (P.) Ltd. (supra), Maruti Udyog Ltd.'s case (supra) and Company Law Institute's case (supra). Therefore, the software purchased will be capital in nature. Accordingly we do not find any infirmity in the order passed by authorities below.

35. The next issue relates to change in method of accounting income on hire purchase transactions from Sum of Digits to Internal Rate of Return Method. We find that this issue is covered by the decision of Special Bench of ITAT, Hyderabad Bench, in the case of Nagarjuna Investment Trust Ltd. (supra), wherein it has been held that SOD is appropriate method to determine income of hire purchase transactions. Respectfully following the order of ITAT, Hyderabad Bench it is held that the issue is covered against the assessee and in favour of the revenue. Accordingly, we do not find any infirmity in the orders passed by authorities below.

36. The last issue for consideration relates to rejection of claims for provision of NPAs. The assessee made provision on account of bad and doubtful debts following the Guidelines issued by Reserve Bank of India. We find this issue is covered by decision of Hon'ble Madras High Court in the case of Micromax Systems Ltd. (supra), wherein it has been held that for allowability of deduction under section 36(1)(vii), the assessee is required to write off the bad debts in the books of account. Further Explanation to section 36(1)(vii) has been inserted with retrospective effect from 1-4-1989 according to which any bad debt or part thereof written off as irrecoverable in the account of assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. We also find that in the case of T.N. Power Finance & Infrastructure Development Corpn. Ltd. (supra), Hon'ble Madras High Court has held that merely because the Reserve Bank of India had directed the assessee to provide for non-performing assets, that direction could not override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia), which stipulate a deduction not exceeding 5 per cent of total income only in respect of the provision for bad and doubtful debts, which are predominantly revenue in nature or trade related and not for provision for non-performing assets, which are of predominately capital nature. Respectfully following the decision of jurisdictional High Court, it is held that provision made for bad and doubtful debts following the Guidelines issued by Reserve Bank of India in respect of NPAs will not be allowable as deduction.

37. Now we will take Revenue's appeal in ITA No. 1978/Mds./2000. The first issue for consideration relates to sales tax collected but not paid. The Assessing Officer found that assessee was accumulating the sales tax to contingency deposit and not offering the amounts collected for the purpose of income-tax. The Assessing Officer brought the sale tax amount to tax following the decision of Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal [1973] 87 ITR 542. The ld. CIT(A) allowed the claim of the assessee following the decision in the case of Sundaram Finance Ltd.

38. Before us it has been submitted by ld. DR that assessee collected sales tax on certain hire purchase transactions. This was not paid to the Government and instead kept as contingency account with the assessee. The amount was not offered as income on the plea that the matter was still in court and had not reached finality. He further submitted that this issue is covered by decision of Hon'ble Supreme Court in the case of K.C.P Ltd. v. Commissioner Of Income Tax, Bangalore [2000] 245 ITR 421 . Ld. AR on the other hand relied on the order of authorities below.

39. We have heard both the parties. In the case before us the assessee has collected sales tax on certain hire purchase transactions. The assessee has not deposited the tax so collected but was credited to contingency account on the ground that the matter is pending in the Court. We find that this issue is covered in favour of revenue by the decision of jurisdictional High Court in the case of Commissioner Of Income-Tax v. Southern Explosives Co. [2000] 242 ITR 107 (Mad.) wherein it has been held that the amounts collected by the assessee were amounts which were meant to be utilised by assessee for meeting its tax liability. Even if the assessee had paid over the entire amount received by it as deposits towards sales tax to the State Government, it would still have been open to assessee to seek refund if the assessee wishes to claim such refund on the ground that the tax had been levied at a higher rate than the rate permissible. The fact that the assessee had chosen to adopt the device of labelling a part of the amounts collected towards its sales tax liability as deposit could not make a difference. The amount formed part of assessee's income, further in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 , Hon'ble Supreme Court held that if a receipt is a trading receipt, the fact that it not so shown in the account books of the assessee would not prevent the assessing authority from treating as a trading receipt. It is the true nature and quality of receipt and not the head under which it is entered in the account books, which is decisive. Eventually if the amount so collected is passed on to the State Government or refunded to the purchasers, the assessee would not be entitled to claim deduction of the sum so paid or refunded. The ratio laid down by Hon'ble Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) was applied while deciding the issue in the case of KCP Ltd. (supra). In this case the assessee collected excess sugar price, which was not taken to profit and loss account. Hon'ble Supreme Court while upholding the order of Hon'ble Andhra High Court held that the amount was retained by assessee as price of the sugar sold by it though right of the assessee to realise the amount was the subject of dispute though the excess amount was retained in separate account that would not make any difference. Merely maintaining a separate accounting under a heading given by assessee would not alter the nature of receipt if it is actually a trading receipt. Respectfully following the decision of Hon'ble Madras High Court in the case of South India Explosives Co. (supra) and decision of Hon'ble Supreme Court in KCP Ltd.'s case (supra), it is held that sales tax collected on hire purchase transaction was liable to be taxed as trading receipt. Accordingly the ld. CIT(A) was not justified in deleting the addition. We, therefore, set aside the order of ld. CIT(A) and restore the order of Assessing Officer on this issue.

40. The next issue relates to higher rate of depreciation on leased vehicles. We find that this issue is covered against the revenue and in favour of assessee by the decision of Hon'ble Madras High Court in the case of CIT v. Madan & Co. [2002] 254 ITR 445 . Respectfully following the decision of jurisdictional High Court, it is held that assessee is entitled for higher rate of depreciation on leased vehicles. Accordingly, we uphold the order of ld. CIT(A) on this issue.

41. In the result assessee's appeal is dismissed and revenue's appeal is partly allowed.