NPA interest accrual and doubtful-debt deduction turn on RBI norms, real income, and tax deductibility limits.

Interest on non-performing assets was treated as not having accrued where binding RBI prudential directions and accepted accounting norms required recognition only on actual realisation, so the addition on de-recognised interest was deleted. A provision for doubtful debts relating to non-performing assets was held not allowable as a deduction, following Supreme Court authority and the view that prudential provisioning does not by itself create a deductible expense under the Income-tax Act, 1961. The result was mixed: the assessee succeeded on accrual of NPA interest, while the Revenue succeeded on disallowance of the doubtful-debt provision.

---

---

Issues: (i) Whether interest on non-performing assets, de-recognised in accordance with Reserve Bank of India directions and accounting standards, was taxable on accrual basis under the Income-tax Act, 1961. (ii) Whether provision for doubtful debts in respect of non-performing assets was allowable as a deduction.

Issue (i): Whether interest on non-performing assets, de-recognised in accordance with Reserve Bank of India directions and accounting standards, was taxable on accrual basis under the Income-tax Act, 1961.

Analysis: The assessee was a registered non-banking finance company bound by the Reserve Bank of India's prudential directions. Those directions required income from non-performing assets not to be recognised merely on accrual and to be accounted for only on actual realisation. The Tribunal noted that the mandatory regulatory framework, coupled with the accepted accounting treatment and the real income principle, meant that no income could be said to have accrued on such assets merely because the mercantile system was followed.

Conclusion: The addition made on account of de-recognised interest on non-performing assets was correctly deleted, and the Revenue failed on this issue.

Issue (ii): Whether provision for doubtful debts in respect of non-performing assets was allowable as a deduction.

Analysis: The Tribunal held that the point stood concluded against the assessee by the Supreme Court. A provision created for non-performing assets under Reserve Bank of India prudential norms was held to be not an allowable expense as a deduction under the relevant provisions of the Income-tax Act, 1961.

Conclusion: The deletion of the addition on account of provision for doubtful debts was reversed and the Revenue succeeded on this issue.

Final Conclusion: The interest-on-NPA issue was decided in favour of the assessee, while the provision-for-doubtful-debts issue was decided in favour of the Revenue, resulting in a mixed outcome across the connected appeals.

Ratio Decidendi: Interest on non-performing assets does not accrue for tax purposes where, under binding regulatory directions and accepted accounting norms, recognition is deferred until actual receipt; but a prudential provision for doubtful debts is not deductible merely because it is charged under banking or regulatory norms.

---