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He also relied on the unreported decisions of Madras High Court in the case of M/s. T.N. Power Finance and Infrastructure Development Corporation Ltd. v. JCIT reported now in 280 ITR 491 and in the case of Southern Technologies Ltd. v. JCIT (T.C No. 1 of 2002 dated 23.01.2002) 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 Id 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 Id DR Shri Shaji Jacob, Section 145 of IT Act, being specific provision would override provisions of Section 45Q of Reserve Bank of India Act.

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 Corporation (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 01.04.1997.

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 Corporation Ltd. v. JCIT, Special Range X 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% 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 mandatory 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. I 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 CIT v. T.N. Power Finance & Infrastructure Development Corporation Ltd. 280 ITR 491, 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.