CIT vs. Vasisth Chay Vyapar (Delhi High Court)

Interest on NPA not assessable on “accrual” basis

The assessee, a NBFC, advanced Inter Corporate Deposits (ICD) to Shaw Wallace. As the interest was not received by the assessee for more than six months in view of the adverse financial position of the borrower, the assessee treated the ICD as a Non Performing Asset (NPA) in terms of the directions of the RBI and did not account for the interest. However, the AO held that as the assessee was following the mercantile system of accounting, the interest had “accrued” even if it was not actually realized. This was confirmed by the CIT (A) though reversed by the Tribunal. On appeal by the department, HELD dismissing the appeal:

U/s 45Q of the RBI Act read with the NBFCs Prudential Norms (Reserve Bank) Directions 1998, it was mandatory on the part of the assessee not to recognize the interest on the ICD as it had become a NPA. The assessee was bound to compute income having regard to the recognized accounting principles set out in Accounting Standard AS-9. AS-9 provides that if there are uncertainties as to recognition of revenue, the revenue should not be recognized. Accordingly, the argument of the revenue that the interest on the NPA can be said to have accrued despite it being a NPA is not acceptable. Southern Technologies vs. JCIT 320 ITR 577 (SC) distinguished. Elgi Finance 293 ITR 357 (Mad) followed.