The new Income Tax Bill intends to resolve the long-standing dispute over the definition of Non-Performing Assets (NPAs). The Select Committee has also called for more clarity on the proposed provision.
The Committee has adopted a report on the amended new I-T Bill, which is now expected to be submitted to the Lok Sabha Speaker early next week. The Bill has been listed for consideration and passage during the forthcoming Monsoon Session, scheduled to start from July 21.
According to the RBI’s Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, an NPA is a loan or an advance where interest and/ or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan.
However, Rule 6EB of the current I-T Rules — based on Section 43(D) of the I-T Act — states that interest income on such NPAs is taxed on a receipt basis only when the account has remained in default for 180 days or more. Despite amendments to the I-T Act, disputes have persisted. “The current framework reflects a misalignment between regulatory and tax treatment of NPAs and has been a point of friction for long,” an tax expert said.
According to her, the key issue is that, once an account is classified as an NPA, banks and NBFCs are required, under RBI norms, Accounting Standard-9, and Ind-AS to stop recognising interest income in their books due to uncertainty in recovery. Yet, tax authorities may still treat such interest as accrued income under the mercantile system unless the 180-day condition under Section 43D is met. In some instances, interest has been taxed on a time basis, even where recovery was highly doubtful. This leads to taxation of notional or unrealisable income, which runs contrary to the ‘real income’ principle repeatedly upheld by the courts.
There have been litigations due to timing mismatch. For example, in Southern Technologies, the Supreme Court held that RBI provisioning guidelines do not override the Income-tax Act. However, this created interpretational uncertainty, which was later clarified by the Delhi High Court in Vasisth Chay Vyapar, where it was held that interest on sticky loans, once classified as NPAs under RBI norms, does not accrue for tax purposes in real terms. The principle of ‘real income’ was recognised, particularly in the context of NBFCs, and this decision has since been affirmed by the Supreme Court.
Now, Section 56 in the new Income Tax Bill proposes, “bad or doubtful debts shall be such categories of debts, as prescribed, having regard to the guidelines issued in relation to such debts by the Reserve Bank of India.”
On the condition of anonymity, a member of the Select Committee told businessline, “We suggested bringing more and more clarity, so that there should not be any more litigation on the issue.”
She opines that new section aims to correct the anomaly. “It proposes to align taxability of interest income from NPAs with the year in which such income is either actually received or credited to the profit and loss account, whichever is earlier. Importantly, it links the definition of ‘bad or doubtful debts’ to the classifications under RBI guidelines. This convergence between tax law and prudential regulation will harmonize treatment across financial, regulatory, and tax domains, reduce disputes, and uphold the fundamental principle that only real, not hypothetical income should be subject to tax,” she said.
