Real income doctrine bars tax on NPA interest where RBI norms allow recognition only on actual receipt.

Interest on non-performing asset loans of a non-banking financial company did not constitute taxable accrual under the mercantile system where RBI prudential norms required recognition only on actual realisation. The Delhi High Court applied the doctrine of real income and treated the RBI framework governing such assets as decisive in determining whether income had accrued for tax purposes. Because recovery of principal was doubtful and interest was not entered in the accounts, no real income arose. The Revenue's challenge therefore failed, and the interest was not taxable in the relevant assessment years.

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Issues: Whether interest on loans classified as non-performing assets in the hands of a non-banking financial company accrued as taxable income under the mercantile system of accounting.

Analysis: The assessee, a non-banking financial company, had classified the relevant loans as non-performing assets under the Reserve Bank of India's prudential norms. The interest was not recognised in the accounts because recovery of the principal itself had become doubtful and, under the applicable RBI directions, interest on such assets was to be recognised only on actual realisation. The Court applied the doctrine of real income and followed its earlier decision on the same legal issue, holding that in these circumstances there was no real accrual of interest income. The statutory force of the RBI framework governing non-banking financial companies was treated as decisive in assessing whether income had accrued for tax purposes.

Conclusion: Interest on the non-performing asset loans did not accrue as taxable income in the relevant assessment years, and the Revenue's challenge failed.

Ratio Decidendi: Where a non-banking financial company is bound by RBI prudential norms requiring income from non-performing assets to be recognised only on actual receipt, interest on such assets does not constitute real accrual of income under the Income-tax Act.

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