Unrealised NPA interest not treated as accrued income for an NBFC where RBI prudential norms override recognition rules.

For an NBFC governed by RBI prudential norms, unrealised interest on a non-performing asset was not treated as accrued income where no receipt had occurred for years and recovery had become uncertain. Section 45Q of the Reserve Bank of India Act gave overriding effect to the RBI directions, so such interest could not be recognised as income under the applicable statutory regime. The addition made on account of interest on NPA was therefore deleted as unsustainable.

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Issues: Whether interest on non-performing assets could be treated as accrued income in the hands of a non-banking financial company governed by Reserve Bank of India prudential norms.

Analysis: The assessee was an NBFC governed by the Reserve Bank of India Act and the prudential norms issued thereunder. The interest in question had not been received for several years, the underlying advance had become a non-performing asset, and recovery itself had become uncertain. In these circumstances, the interest could not be said to have really accrued. The statutory regime applicable to NBFCs, including section 45Q of the Reserve Bank of India Act, gave effect to the RBI directions and prevented recognition of such unrealised interest as income.

Conclusion: The addition on account of interest on NPA was not sustainable and was deleted in favour of the assessee.

Ratio Decidendi: For an NBFC governed by RBI prudential norms, unrealised interest on a non-performing asset does not constitute accrued income where recovery is doubtful and the RBI statutory directions prevail.

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