RBI prudential norms stopping banks from recognising interest income on NPA accounts do not wipe out the borrower’s obligation to accrue and recognise interest expense in its own financial statements. Under Ind AS 109, a borrower cannot stop recognising interest merely because the account has turned NPA or because a one-time settlement is under discussion
The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) in the case of CA Som Prakash Aggarwal vs NFRA [Comp. App. (AT) No. 200 of 2022] dated July 13, 2026, has clarified that RBI prudential norms stopping banks from recognising interest income on NPA accounts do not wipe out the borrower’s obligation to accrue and recognise interest expense in its own financial statements. Under Ind AS 109, a borrower cannot stop recognising interest merely because the account has turned NPA or because a one-time settlement is under discussion. Interest liability continues until the liability is legally extinguished, modified, discharged, cancelled, or expires.
The Tribunal also laid down that Standards on Auditing are mandatory and not mere guiding principles. An auditor of a listed entity must maintain proper documentation, obtain sufficient appropriate audit evidence, apply professional scepticism, and issue a modified opinion where the financial statements are materially misstated. Failure to do so can amount to professional misconduct under the Chartered Accountants Act and attract action under Section 132(4) of the Companies Act.
The Tribunal further held that an audit firm has independent and primary liability for quality control failures under SQC 1, separate from the engagement partner’s personal liability. The firm cannot escape liability by arguing that only the engagement partner was responsible for audit execution. Proceedings against both the firm and the individual auditor on the same audit are legally maintainable and do not amount to double jeopardy.
The Tribunal found that RBI’s IRACP norms apply to banks as regulated entities and only govern when banks can recognise interest income on NPA accounts. Those norms do not extinguish the borrower’s contractual obligation to account for interest expense in its own books. The Tribunal emphasised that the RBI circular itself required banks to keep a memorandum record of accrued interest on NPA accounts, which showed that the underlying borrower liability continued to exist.
On Ind AS 109, the Tribunal held that borrowings remain financial liabilities measured at amortised cost using the Effective Interest Method unless the liability is legally extinguished, discharged, cancelled, or expires. A mere expectation of one-time settlement or future waiver cannot justify non-recognition of accrued interest. The Tribunal said expected OTS cash flows cannot be substituted for contractual cash flows unless there is a legally concluded modification or extinguishment of the liability.
On audit standards, the Tribunal found serious failures in audit documentation, risk assessment, audit evidence, and professional scepticism. It noted that the audit file lacked documentation of the NPA interest issue, challenge to management’s accounting treatment, bank confirmations, revised loan documents, or records of discussions on the alleged OTS.
The Tribunal held that audit documentation is not a mere formality and that without documentation there is no verifiable basis for the audit opinion.
The Tribunal also found that the management representation letter relied on by the auditor was unreliable because it was not on letterhead, did not identify the signing authority, and contained an impossible reference to inventory records as on a later date. It said reliance on such a defective document as the basis for accepting a material accounting treatment and still issuing an unmodified opinion reflected a fundamental failure of professional duty. As to the audit report, the Tribunal held that an unmodified opinion was plainly unsustainable because the alleged misstatement affected finance costs, current liabilities, profit before tax, profit after tax, retained earnings, and net worth. In such circumstances, the auditor ought to have at least considered a modified opinion, whether qualified or adverse, instead of certifying that the financial statements gave a true and fair view.
On the audit firm’s liability, the Tribunal rejected the argument that only the engagement partner could be proceeded against. It held that the firm, as the appointed statutory auditor, had independent and primary responsibility under SQC 1 to establish and ensure implementation of quality control systems. Merely having a policy document was not enough; the firm had to ensure that its personnel complied with professional standards and that audit reports issued by the firm or its engagement partner were appropriate.
