Accrual taxation of loan interest prevails where RBI non-performing asset norms are not proved applicable.
Interest on loans advanced by a non-banking financial company was treated as taxable on accrual because the assessee followed the mercantile system and produced no material showing contractual default, overdue interest, or valid classification of the advances as non-performing assets under RBI directions. The absence of repayment demand or legal steps to recall the loans weakened the claim that no income had arisen. Tax deduction at source by borrowers and their treatment of the interest as payable further supported accrual. The RBI prudential norms did not displace the Income-tax Act's accrual principle or the statutory charge to tax, so the claim of non-accrual based on real income was rejected.
Issues: Whether interest on loans advanced by a non-banking financial company could be taxed on accrual basis despite non-receipt, where the assessee claimed application of RBI prudential norms relating to non-performing assets.
Analysis: The loans were advanced on promissory notes and no material was produced to show that interest had become overdue in the contractual sense or that any demand had been made for repayment of the principal. The assessee had not taken legal steps to recall the loans, and there was nothing to show that the advances satisfied the definition of non-performing asset under the RBI Directions. The applicable prudential norms could not displace the income-tax principle of accrual where the assessee followed the mercantile system. The Revenue also showed that the borrowers had treated the interest as payable and had deducted tax at source, supporting accrual. The principle of real income was not attracted on these facts, and the RBI norms could not override the statutory charge under the Income-tax Act.
Conclusion: The interest income had accrued and was taxable on accrual basis. The assessee's claim based on RBI prudential norms was rejected, and the deletion of the addition was held to be incorrect.
TaxTMI 
AI Drafter ✕
TaxTMI 
