Taxability of non-performing asset interest depends on recognition, not mere mercantile accrual, for NBFCs.

Interest on non-performing assets of a non-banking financial company was not taxable on accrual merely because the assessee followed the mercantile system of accounting. The Tribunal applied the jurisdictional High Court's ruling in the assessee's own case and noted the Delhi High Court's later view, both of which held that such interest can be brought to tax only when the income is recognised under prudential norms. The presence of mercantile accounting did not override the treatment required for non-performing assets. Accordingly, the interest on the non-performing assets was held not assessable on accrual basis in the assessee's hands.

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Issues: Whether interest on non-performing assets of a non-banking financial company was assessable on accrual basis despite the assessee following the mercantile system of accounting and the Reserve Bank of India prudential norms.

Analysis: The issue was covered by the jurisdictional High Court's decision in the assessee's own case, which held that interest on non-performing assets can be brought to tax only when the income from such assets is recognized. The Tribunal also noticed the subsequent Delhi High Court view, which applied the same principle after considering the Supreme Court decision in Southern Technologies. On this basis, the Tribunal held that mere mercantile accounting did not justify taxing such interest on accrual when the asset had become non-performing.

Conclusion: Interest on non-performing assets was not taxable on accrual basis in the assessee's hands.

Ratio Decidendi: For a non-banking financial company governed by prudential norms, interest on non-performing assets is taxable only on recognition and not merely on accrual under the mercantile system.

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