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He contended that RBI is an authority that controls the functioning of banking and non-banking financial companies and it keeps a watch on the functioning of these institutions for the sole purpose of making sure that these institutions remain sound that would also make the country's finances good. He pleaded that NBFC are required to be registered and submit reports on its functioning which would be examined critically by RBI based on which it may allow or relax in regard to the extent of acceptance of deposits which deposits are the prime source of functioning of NBFC. He contended that the term 'non-performing assets' had been coined by RBI to bring the true picture of financial soundness of each advance or loan given by NBFC. He submitted that the loan or advance which did not yield regular income and regular repayment of principal fall into the category 'non-performing asset' and it points out the fact to the extent the loans or advances are grouped under the head 'non-performing assets' the asset may not be realizable resulting in loss to NBFC. Such loans where recovery had been irregular or recovery had been made possible because of the intervention of the Court, could lead to loss to NBFC resulting in lowering its capital base that would have impact on the extent of deposit that could be mobilized by NBFC.

The circular as reproduced above states that NBFC would be allowed to mobilize deposits from various sources to a maximum of ten times of its net owned funds subject to it adhering to the norms prescribed, credit rating and so on. Therefore, it indicates that the source of working capital for NBFC from deposits, loans, borrowings from financial institutions including from issue of bonds, debentures, etc., have a upper ceiling limit and that NBFC must operate within those limits. RBI apparently had also issued 'Non-Banking Financial Companies (Reserve Bank) Directions,1977' to which reference was repeatedly made in the various circulars meant for NBFC. RBI is a statutory authority and accordingly using its power under the statute had issued the various directions and these circulars and expects them to be adopted, followed religiously and rigorously leaving no option to NBFC. These are issued for the purpose of making the NBFC's function soundly, safely with the ultimate aim of making the finance market a safe ground to operate upon on which the economy of this country is very much depended upon.

The accounting standards prescribed for being followed by NBFC cover the various areas of business activity of NBFC. While dealing with income recognition it was categorical that it should be recognized on actual recovery basis because, accrual basis do not reflect the availability of cash liquidity and may present a rosy picture, which may lead to over involvement in business resulting in grave risk. The norm are the safety rules to be followed by NBFC failing which their extent of operation may get curbed in the shape of reduction in total of deposits and loans from being ten times its net owned funds to lesser quantum and this would send signals in the finance market about the reputation of NBFC from a stable and reliable to one of unreliable NBFC.

Provision for doubtful advances made following the directive of RBI which according to RBI would give a near true picture of the assets and liabilities of NBFC has to be made by NBFC if it has to continuously get the patronage of RBI and remain in business by avoiding unscrupulous methods. Income-tax Department is one wing of the Finance Ministry to which RBI is also attached and therefore when one of its wings controls the finance of the economy by issuing guidelines required to be followed by NBFC, the other wing in our view must accept the action of NBFC as a legal, valid and bona fide one. The consequence is the share in the true income of NBFC would have to be restricted to that part that is arrived at after allowing for provision for doubtful and non-performing assets. RBI's directive to account for the income on cash basis is an appreciation of the fact that it does not make any sense to account the income on accrual basis giving no credence to actual recovery and later allowing deduction for irrecoverable debts including debts that could not be recovered in full from the security provided because of erosion in the value of the security. The Department that is partner in income earned by companies and other persons to our mind should accept the concept of income as directed to be shown by RBI and after deducting for provision for doubtful loans and advances from such income. When the directive of RBI is followed for running of the business and reporting it to RBI, notwithstanding the fact that Section 36 of the Act does not contain any specific sub-section or sub-clause cavering the contingency as in the case of NBC, it could be allowed as write off because there are authorities that state that provision is equal to write off because the debit is given to P&L account. It can be viewed from one other angle and that is that the loans and advances could be taken as investments made to yield income, which investments have eroded in its true value and because the realizable market value as at the close of the accounting year may be lower than the initial investment that may result in the erosion in the capital and net owned funds, and this being in the nature of anticipated loss needs to be considered in the determination of the income of the year.