Facts of the Case

The appellant, Housing and Urban Development Corporation Limited (HUDCO), a public sector undertaking engaged in housing finance and urban infrastructure development, claimed deduction for de-recognition of accrued interest on Non-Performing Assets (NPAs) for Assessment Years 2005–06 to 2009–10.

HUDCO relied upon revised NHB prudential guidelines effective from 31 March 2005, under which loans with unpaid interest beyond 90 days were classified as NPAs. Based on this classification, HUDCO de-recognized such interest income and claimed deduction accordingly.

The Assessing Officer (AO), however, applied Section 43D read with Rule 6EB of the Income Tax Rules, which prescribed a six-month overdue period for classification as NPA for tax purposes. Consequently, part of the claimed deduction was disallowed and added back to taxable income. The Commissioner (Appeals) upheld the disallowance, and the ITAT confirmed the application of Rule 6EB while remanding computation for exact determination.

Issues Involved

  1. Whether NHB prudential norms automatically override Rule 6EB for tax computation purposes?
  2. Whether revised NHB guidelines reducing NPA recognition period from 180 days to 90 days automatically amend Rule 6EB?
  3. Whether HUDCO was entitled to deduction based on NHB norms instead of Rule 6EB?
  4. Whether the principle of “real income” applies to deduction under Section 43D?

Petitioner’s Arguments (HUDCO)

  • HUDCO contended that its accounts were prepared strictly in accordance with NHB directions and duly audited by statutory auditors and CAG.
  • NHB directions issued under Section 30A were mandatory and binding.
  • Section 36 of the NHB Act overrides inconsistent provisions of other laws.
  • Section 43D itself states that prescribed categories of bad debts must be determined “having regard to” NHB guidelines.
  • Therefore, the revised NHB norm of 90 days should prevail over Rule 6EB.
  • HUDCO also invoked the real income theory, arguing that unrealizable interest cannot be taxed.

Respondent’s Arguments (Revenue Department)

  • The Revenue argued that deduction for tax purposes must strictly comply with Section 43D and Rule 6EB.
  • NHB guidelines regulate accounting and prudential norms, not taxable income computation.
  • Rule 6EB specifically prescribes the categories and conditions for NPA deduction under tax law.
  • Unless Rule 6EB is formally amended, NHB guideline changes cannot automatically alter tax treatment.

Court Findings / Court Order

The Delhi High Court dismissed HUDCO’s appeals and held:

  1. Section 43D read with Rule 6EB forms a complete code for determining taxability of interest on bad and doubtful debts.
  2. The phrase “having regard to” NHB guidelines does not mean automatic incorporation of every amendment in NHB guidelines into Rule 6EB.
  3. NHB prudential norms and Income Tax provisions operate in distinct fields.
  4. NHB guidelines govern financial reporting and prudential norms, whereas tax deductions are governed exclusively by the Income Tax Act and Rules.
  5. The real income principle has no application in cases governed specifically by Section 43D.
  6. Unless Rule 6EB is amended by the rule-making authority, NHB guideline revisions do not affect tax deduction eligibility.

Accordingly, the substantial question of law was answered in favour of the Revenue and against HUDCO, and all appeals were dismissed.

Important Clarification by the Court

The Court clarified an important distinction between:

  • Income Recognition (Accounting Purpose)
    and
  • Tax Computation (Statutory Deduction Purpose)

Even though NHB norms may govern accounting recognition of NPAs, tax deductions under Section 43D are governed solely by statutory provisions and prescribed rules.

The expression “having regard to” does not mean “in accordance with”. This distinction was central to the decision.

Sections Involved

  • Section 43D – Taxability of interest on bad and doubtful debts
  • Section 260A – Appeal to High Court
  • Section 143(2) – Scrutiny Assessment
  • Section 143(3) – Assessment Order
  • Rule 6EB – Categories of bad and doubtful debts for public companies

Section 30A – Power of NHB to issue policy directions

  • Section 36 – Overriding effect of Chapter V 

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:3202-DB/SMD03072017ITA4402016.pdf

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