Real income doctrine bars tax on notional interest from NPA loans when recovery remains objectively uncertain.

Interest on sticky loans classified as non-performing assets was held not to be taxable as income when recovery of principal and interest was objectively uncertain. Mere mercantile accounting did not require recognition of notional interest if it had not in substance accrued as real income. Section 145 governs computation of income, but it cannot expand chargeability beyond the charging provisions. The principle of prudence, supported by RBI prudential norms and NPA classification, justified postponing recognition until the income became reasonably realizable.

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Issues: Whether interest on sticky loans classified as non-performing assets, though theoretically accruing under the mercantile system of accounting, could be taxed as income when collection of principal and interest was uncertain.

Analysis: The assessee, a non-banking financial company, had not credited interest on certain loans because the borrowers had defaulted and recovery of both principal and interest had become doubtful. The mere fact that accounts were maintained on the mercantile basis did not compel taxation of a sum that had not in substance accrued as real income. Section 145 governs computation of income, but it cannot enlarge the ambit of chargeability under the charging provisions. Where objective facts show that recovery is uncertain and the revenue has not materialised, recognition of such interest can be postponed consistently with the principle of prudence and the doctrine of real income. The RBI prudential norms and the assessee's NPA classification supported the view that the disputed interest was not reasonably realizable during the year.

Conclusion: The notional interest on the sticky/NPA loans was not taxable in the relevant year and the addition was unsustainable.

Ratio Decidendi: Income is not taxable merely because it is theoretically accrued under mercantile accounting if, on objective facts, its realisation is uncertain and the amount has not in substance become real income.

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