Judgment :-

S.H. KAPADIA, J.

Leave granted in the Special Leave Petition.

Introduction

An interesting question of law which arises for determination in these Civil Appeals filed by Non-banking Financial Companies ("NBFCs" for short) is:

"Whether the Department is entitled to treat the "Provision for NPA", which in terms of RBI Directions 1998 is debited to the P&L Account, as "income" under Section 2(24) of the Income Tax Act, 1961 ("IT Act" for short), while computing the profits and gains of the business under Sections 28 to 43D of the IT Act?"

Facts

For the sake of convenience, we may refer to the facts in the case of M/s. Southern Technologies Ltd. [Civil Appeal No. 1337 of 2003].

At the outset, it may be stated that categorization of assets into doubtful, sub-standard and loss is not in dispute.

The financial year of the Appellant is July to June and the P&L Account and the Balance Sheet are drawn as on 30th June. The P&L Account and Balance Sheet is for shareholders, Reserve Bank of India (RBI) and Registrar of Companies (ROC) under the Companies Act, 1956. However, for IT Act, a separate P&L Account is made out for the year ending 31st March and the Balance Sheet as on that d