Taxability of NPA interest turns on actual accrual and factual uncertainty in recovery, not RBI classification alone

Interest on non-performing assets cannot be excluded from taxable income merely because RBI prudential norms classify the loans as NPAs; tax recognition and income accrual are governed separately under the Income-tax Act. Mere NPA classification does not by itself show that interest has not accrued, and the assessee must establish on the facts of each account that recovery was uncertain and income was not recognised for that reason. The matter therefore required fresh factual examination in light of the Supreme Court principles, and the earlier orders deleting accrued interest could not be sustained on the existing record.

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Issues: Whether accrued interest on non-performing assets could be excluded from taxable income merely because the assessee followed RBI guidelines and classified the loans as NPAs, and whether the matter required a factual examination of uncertainty in recovery.

Analysis: The dispute turned on the distinction between income recognition under RBI prudential norms and taxability under the Income-tax Act. The Court held that the RBI directions and the Income-tax Act operate in different fields, and that mere classification of an account as an NPA does not by itself establish that interest has not accrued. Collectibility is distinct from accrual, and the assessee must show, on the facts of each case, that the income was not recognised because of uncertainty in recovery. The earlier view in Elgi Finance was held not to conclude the matter without applying the principles stated by the Supreme Court in Southern Technologies, particularly the need for case-specific factual examination by the Assessing Officer.

Conclusion: The deletion of accrued interest on NPAs could not be sustained on the present record, and the issue had to be reconsidered afresh by the Assessing Officer on the basis of the Supreme Court's principles and the facts of each account.

Final Conclusion: The appellate orders were set aside and the matters were sent back for fresh consideration in accordance with law.

Ratio Decidendi: For tax purposes, interest on NPAs cannot be excluded merely because it is not recognised under RBI prudential norms; the assessee must establish, on the facts of each case, that the income did not accrue because of uncertainty in realisation.

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