Saturday, July 19, 2014

NBFC couldn't take shelter of prudential norms to treat overdue interest as NPA if it didn't try to recover it

Overdue interest could not be treated as NPA by taking shelter of prudential norms of RBI prohibiting recognition of interest on loans, which remained overdue for more than six months if assessee had not taken any steps to recover it.


a)The assessee, a company registered as NBFC, advanced term loans to two companies. In return of income, the assessee didn’t show interest income on the ground that prudential norms of RBI prohibited recognition of interest on loans which remained overdue for more than six months.

b)The Assessing Officer (‘AO’) opined that assessee was bound to show the interest accrued on the loans as its income as it was following mercantile system of accounting. Further, he held that interest accrued on loans was chargeable to tax and consequently, made additions.

c)On appeal, the CIT(A) deleted the additions made by AO. The aggrieved revenue filed the instant appeal. The Tribunal held in favour of revenue as under:

1)Rule 3 of prudential norms states that income including interest/discount shall be recognized only when it is actually realised if a loan is considered as NPA. It further prescribes that a loan can be treated as NPA when it remained overdue for a period of six months or more. However, in the instant case, the assessee had been unable to produce any document to show that it had made any demand for return of the loan.

2)As per section 5 of the income-tax Act, total income shall include all income from whatsoever source derived by such person, which accrues or arise to him in a given in previous year.

3)In case of Southern Technologies Ltd. v. Jt. CIT [2010] 187 Taxman 346 (SC) it was held by the Supreme Court that prudential norms issued by the Reserve Bank of India could not override the provisions of the Act. Thus, by virtue of the application of the accrual principle, interest income had definitely accrued to the assessee.

4)The concerned companies (i.e. borrowers) were charging interest in their respective accounts, deducting tax at source and also remitting such tax to the Government account. Hence, there was nothing on record to show that there was no possibility of realising the interest.

5)Hence, one could not presume that interest income was illusory. Therefore, the CIT (A) had erred in deleting the addition made by the AO – ITO V. TRADELINK SECURITIES LTD [2014] 46 190 (Kolkata - Trib.)