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AI Drafter ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether interest on loans classified as non-performing assets under RBI prudential norms could be treated as accrued income chargeable to tax under the Income-tax Act.
Analysis: The assessee, a non-banking financial company, had not received interest on certain advances for a prolonged period and treated the accounts as NPAs in accordance with RBI directions. The Court applied the principle that income tax is charged on real income and not on hypothetical accruals. It relied on the binding effect of Section 45Q of the Reserve Bank of India Act, 1934, which gives overriding force to RBI directions in matters of income recognition, and on the settled position that prudential norms govern recognition of income for NBFCs. The Court held that, where recovery of interest is uncertain and the accounts have become NPAs, mere mercantile accounting does not create taxable accrual of interest income.
Conclusion: Interest on the NPAs did not accrue as taxable income, and the addition made by the Revenue was unsustainable.
Final Conclusion: The appeal failed and the question of law was answered against the Revenue, leaving the deletion of the notional interest addition undisturbed.
Ratio Decidendi: For an NBFC governed by RBI prudential norms, interest on an account that has become an NPA is not taxable on a notional accrual basis where recovery is uncertain, because real income alone can be brought to tax and RBI directions control income recognition.
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