Section 43D on NPA recoveries: interest becomes taxable only on proper appropriation and recognition, not mere receipt.

Section 43D applies to banks and specified institutions by deferring taxability of interest on bad or doubtful debts until the interest is credited to the profit and loss account or actually received, whichever is earlier, in line with RBI guidelines on consistent appropriation. A recovery from NPA accounts retained in sundry payable because the underlying borrower and guarantor dispute had not been finalised was not taxable merely on receipt. The amount was later appropriated as interest income in subsequent assessment years, and taxing it in the earlier year would have created double taxation. The recovery was therefore taxed only when duly appropriated and recognised as interest income.

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Issues: Whether the sum of Rs. 1,20,87,000 recovered from NPA accounts was taxable in the assessment year 2013-14 under section 43D of the Income-tax Act, 1961, or whether it became taxable only when appropriated and recognised as interest income in the later assessment years.

Analysis: Section 43D is a special non obstante provision governing interest on bad or doubtful debts in the case of banks and specified institutions. The provision requires taxability in the year in which the interest is credited to the profit and loss account or actually received, whichever is earlier, read with the RBI guidelines on uniform and consistent appropriation of recoveries. The amount in question had been received during the relevant previous year but was kept under sundry payable because the borrower and guarantor dispute had not attained finality. The records showed that the bank later appropriated Rs. 91,00,000 in assessment year 2016-17 and Rs. 29,87,000 in assessment year 2017-18 as interest income. The principle of appropriation of payments also supported the bank's right to apply the recovery when the uncertainty was resolved. On these facts, taxing the same amount in assessment year 2013-14 would result in double taxation and would not accord with the statutory scheme of section 43D.

Conclusion: The amount was not taxable in assessment year 2013-14 and was correctly brought to tax in the later years when it was appropriated as interest income. The addition was deleted and the issue was decided in favour of the assessee.

Ratio Decidendi: For a bank governed by section 43D, a recovery from NPA accounts becomes taxable as interest only when it is duly appropriated and recognised in accordance with RBI guidelines, and mere receipt of the money without such appropriation does not fix taxability in that year.

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