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Issues Involved:
1. Treatment of income from SLR investments: Business income or income from other sources. 2. Eligibility for deduction under section 36(1)(viii) on income from SLR investments. 3. Assessment of income from non-performing assets: Mercantile basis or cash basis. Issue-wise Detailed Analysis: 1. Treatment of Income from SLR Investments: The primary issue was whether the income from Statutory Liquidity Ratio (SLR) investments should be classified as "Income from Business" or "Income from Other Sources." The appellant, a Housing Finance Company, argued that since the SLR investments were mandated by law (NHB Act), the income derived from these investments should be considered part of the business income. The Assessing Officer and CIT(A) had previously classified this income under "Income from Other Sources," thus disallowing the statutory deduction under section 36(1)(viii). 2. Eligibility for Deduction under Section 36(1)(viii): The appellant claimed deductions under section 36(1)(viii) on dividends and interest earned from SLR investments, asserting that these investments were integral to their housing finance business. The CIT(A) upheld the Assessing Officer's decision, stating that dividends and interest should be assessed under "Income from Other Sources" per sections 56 and 57 of the Income-tax Act, thereby disqualifying the appellant from the deduction. The appellant's counsel argued that the SLR investments were a statutory requirement crucial for the business's operation, making the income from these investments a part of the housing finance business. The Tribunal agreed with this view, noting that the investments were not a separate activity but intertwined with the housing finance business. The Tribunal concluded that the income from SLR investments should be treated as business income, making the appellant eligible for deductions under section 36(1)(viii). 3. Assessment of Income from Non-Performing Assets (NPAs): For the assessment year 1997-98, the issue was whether income from NPAs should be assessed on a mercantile basis or a cash basis. The appellant had shifted to a cash basis of accounting for NPAs following NHB guidelines, which mandated recognizing income from NPAs only when actually received. The Assessing Officer and CIT(A) insisted on a mercantile basis, citing section 145 of the Income-tax Act and the Supreme Court's decision in State Bank of Travancore v. CIT. The Tribunal, however, noted that the NHB Act's provisions, which override other laws, required the appellant to follow NHB guidelines. The Tribunal referenced the Supreme Court's decision in UCO Bank v. CIT, which supported recognizing income on a cash basis for NPAs. Consequently, the Tribunal held that the income from NPAs should be assessed on a cash basis, aligning with NHB guidelines and overriding the mercantile system mandated by section 145. Conclusion: The Tribunal ruled in favor of the appellant on both issues. It determined that income from SLR investments should be treated as business income, making the appellant eligible for deductions under section 36(1)(viii). Additionally, it concluded that income from NPAs should be assessed on a cash basis, following NHB guidelines. Thus, both appeals were allowed.
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