Derecognised interest on NPAs was not added as income where an NBFC followed prudential norms and settled past treatment.

Interest on non-performing assets was held not to be taxable on a pure accrual basis where an NBFC followed regulatory prudential norms and the cash system for such interest was accepted as legal, valid and bona fide under the CBDT circular. The Tribunal also relied on the fact that the same treatment had already been accepted in the assessee's own earlier assessment years, giving the issue finality. On that basis, the disallowance of derecognised interest could not be sustained and the deletion was upheld.

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Issues: Whether the disallowance of derecognised interest on non-performing assets was rightly deleted.

Analysis: Interest on sticky loans is ordinarily taxable on accrual basis, but the CBDT circular permitted acceptance of the cash system of accounting for interest where the change is legal, valid and bona fide and where the assessee is governed by regulatory directions. The assessee, being an NBFC, followed the prescribed prudential norms and the same issue had already been decided in its favour in earlier assessment years. In view of that consistent treatment and the binding effect of the earlier decisions in the assessee's own case, the addition made by the Assessing Officer could not be sustained.

Conclusion: The deletion of the disallowance was upheld and the Revenue's ground failed.

Final Conclusion: The appeal was dismissed, and the assessee's treatment of derecognised interest remained undisturbed.

Ratio Decidendi: Where an NBFC follows regulatory prudential norms and the issue has already attained finality in its own case, derecognised interest on NPAs cannot be added as income merely on accrual principles.

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