Money & Banking

Interest income on NPAs: NBFCs pin hope Jaitley will go with apex court ruling

K.R.Srivats New Delhi | Updated on January 18, 2018

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Expect income tax law to be amended in budget to tax interest income from NPAs on receipt basis for NBFCs

Non Banking Finance Companies (NBFCs) have cause for cheer as the Supreme Court has ruled that interest income on non performing assets (NPAs) should not be taxed on accrual basis.

They are now quite hopeful that Finance Minister Arun Jaitley will in the upcoming budget amend the income tax law to factor in this apex court ruling and explicitly state that such interest income from NPAs will be taxed only on receipt basis for NBFCs.

Speaking to BusinessLine, Raman Aggarwal, Chairman, Finance Industry Development Council (FIDC), a self regulatory body for asset financing NBFCs, said that the Supreme Court order (CIT-vs-Vasisth Chay Vyapar Ltd), in principle, is in line with a long standing demand of the NBFC Sector.

The basic stance taken by the court is that income on NPAs should only be recognized on receipt basis and not accrual basis for the purpose of the levy of income tax, he said.

Aggarwal also said that FIDC has requested the Finance Minister Arun Jaitley to allow NBFCs also to recognize income on NPAs only when it is received and not when it is accrued, which is the current practice.

Section 43D of the Income Tax Act exactly deals with this. But unfortunately NBFCs are denied coverage under Section 43D. “We therefore reiterate our request to extend coverage of NBFCs under Section 43D in the forthcoming Union Budget 2018”, he said.

In the CIT vs Vasisth Chay Vyapar Ltd case, the Supreme Court upheld the orders passed by the Income Tax Appellate Tribunal (ITAT) and also Delhi High Court.

They dismissed the income tax department's appeal in the Supreme Court. ITAT in their order stated that as per Section 45Q of The RBI Act, 1934 , provisions of the RBI Act (under which RBI has the powers to issue Directions - including the Prudential Norms on Asset Classification and Income Recognition) override the provisions of the Income Tax Act.

Further, the apex court held that even under the Income Tax Act, there is need to follow the principle of "real income" , and in case of NPAs the recovery of the principal amount itself is doubtful, what to say of the interest income. So the interest income in such cases (i.e NPAs) cannot be taken on accrual basis, according to the apex court.

Published on January 18, 2018

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