Section 43D benefit for State industrial finance companies denies accrual taxation of interest on non-performing assets.

A Government company whose share capital is held by the State Government and which provides long-term finance for industrial projects falls within the definition of a State Industrial Investment Corporation under section 43D. On that basis, it is entitled to the benefit of section 43D for interest recognition. Where the loan is classified as a non-performing asset in accordance with RBI prudential norms, interest is not required to be recognised on accrual and cannot be taxed on that basis. The Tribunal followed the statutory definition in Explanation (f) and the assessee's own earlier decision, and upheld realisation-based recognition of the disputed interest.

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Issues: Whether the assessee qualified as a State Industrial Investment Corporation entitled to the benefit of section 43D of the Income-tax Act, 1961, and whether interest on the loan classified as a non-performing asset was taxable on accrual.

Analysis: The assessee was a Government company with its paid-up share capital held by the State Government and was engaged in providing long-term finance for industrial projects. On the statutory definition in Explanation (f) to section 43D, a State Industrial Investment Corporation means a Government company engaged in that business. The Tribunal also noted that the assessee had classified the loan as a non-performing asset in accordance with RBI prudential norms, and once so classified, interest was not required to be recognised as income on accrual. The earlier decision in the assessee's own case had already taken the same view.

Conclusion: The assessee was entitled to the benefit of section 43D, and the disputed interest could not be brought to tax on accrual.

Ratio Decidendi: A Government company engaged in providing long-term finance for industrial projects falls within the definition of a State Industrial Investment Corporation under section 43D, and interest on loans classified as non-performing assets is not taxable on accrual where statutory and prudential norms permit recognition only on realisation.

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