The Supreme Court of India has delivered a significant ruling clarifying that for the purposes of the Income Tax Act, loans will be classified as Non-Performing Assets (NPAs) only after a default period of 180 days, as prescribed under the Income Tax Rules, and not after 90 days as mandated by the National Housing Bank (NHB) prudential norms. The judgment came in the case of Housing and Urban Development Corporation Limited (HUDCO) v. Additional Commissioner of Income Tax, Range 12, wherein the Court dismissed HUDCO’s review petition challenging the earlier decision. Emphasizing that the Income Tax Act is a self-contained code, the Court held that regulatory guidelines issued by NHB or other authorities cannot override or be automatically imported into statutory tax provisions for determining income recognition and deductions. This decision holds far-reaching implications for NBFCs, Housing Finance Companies, and other financial institutions in aligning their tax reporting with statutory norms while maintaining separate records for regulatory compliance.
Background
☑️HUDCO’s loan account classification was disputed regarding the timing of treating the loan as a Non-Performing Asset (NPA).
☑️NHB Guidelines prescribe that loans be classified as NPAs after 90 days of default.
☑️Income Tax Act and corresponding rules stipulate 180 days for NPA classification for tax purposes.
☑️The dispute arose in the context of a Resolution Plan under IBC, where the earlier NPA classification had tax computation implications.
Core Legal Issue
Whether the 90-day NPA norm under NHB guidelines automatically applies for Income Tax Act purposes, or whether the 180-day statutory period under tax rules prevails.
Supreme Court’s Observations
✅The Income Tax Act is a complete code in itself for the purposes of computation of taxable income and related classifications.
✅Regulatory norms (like NHB/RBI prudential norms) do not automatically override statutory tax provisions.
Interpretation Principle
✅Specific statutory provisions under the Income Tax Rules take precedence over general regulatory guidelines when determining tax treatment.
NPA Recognition for Tax Purposes
For tax computation, the NPA status must be determined only by the 180-day rule specified in the Income Tax framework.
NHB’s 90-day norm may still apply for regulatory reporting and prudential provisioning, but not for tax accounting.
Ruling
☑️180-day rule prevails for NPA classification under the Income Tax Act.
☑️NHB’s 90-day NPA norm cannot be imported into the Income Tax Act for determining interest accrual or provisioning deductibility.
☑️HUDCO’s Resolution Plan was rejected as it had relied on the 90-day classification for tax implications.
Significance of the Judgment
For Taxation
NBFCs, HFCs, and other financial institutions must compute taxable interest income and allowable provisions strictly based on the 180-day norm.
For Dual Reporting
✅Entities must maintain two sets of NPA classifications:
One for statutory financials as per NHB/RBI prudential norms (90 days)
One for tax computations (180 days)
For Insolvency & Resolution
The timing of NPA recognition can affect eligibility for resolution plans, provisioning requirements, and valuation metrics under IBC.
For Legal Clarity
Prevents arbitrary application of regulatory norms in tax law, ensuring certainty and uniformity.
Key Takeaways
📌 Tax law supremacy – Statutory provisions prevail over regulatory guidelines for tax purposes.
📌 180-day threshold – Mandatory for NPA recognition in income tax computations.
📌 Operational vs. Tax Divergence – Regulatory norms still bind for operational/regulatory purposes, but not for taxation.