Interest on Non Performing Assets which is doubtful of recovery, taxable on receipt basis

Interest on Non Performing Assets which is doubtful of recovery, taxable on receipt basis

In a recent decision, in the case of CIT Vs. Vasisth Chay Vyapar Ltd. (Delhi High Court) [ITA 552/2005] dated 29 November, 2010, the Delhi High Court in the context of loans given by a Non-Banking Financial Company (“NBFC”) held that in a scenario where interest on Non Performing Assets (“NPA”) was doubtful of recovery due to adverse financial circumstances of the borrower, it was legitimate move to infer that interest income had not accrued and was therefore not exigible to tax, irrespective of the fact that assessee followed mercantile system of accounting.

Facts

• The assessee a NBFC had advanced Inter Corporate Deposits (“ICD”) to M/s Shaw Wallace Company. The interest on such ICD was outstanding since assessment year 1996-97 and the position remained the same until assessment year 2006-07.

•  The assessee being an NBFC had classified the ICD as NPA in accordance with the provisions of the Reserve Bank of India Act, 1934 (“RBI Act”) read with NBFCs Prudential Norms (Reserve Bank) Directions, 1998 (“Prudential Norms”). Accordingly, the interest accrued on such NPA was not recognized as income in the books of accounts of the assessee.

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