Banking income on NPAs and Government securities: real income and prudential norms govern tax treatment

Banking income on non-performing assets is discussed on the principle of real income, with interest recognised on a receipt basis treated as not accruing on a notional basis where that method is consistently followed. Premium amortisation on Government securities in the banking investment portfolio is also treated as allowable when spread over the remaining maturity period in line with prudential banking norms. The note further records that a minor depreciation ground was not pressed, while interest under section 234B was considered consequential and the section 234A issue required factual verification on filing of the return within the prescribed time.

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Issues: (i) whether estimated accrued interest on non-performing assets was taxable in the assessee-bank's hands; (ii) whether amortisation of premium paid on purchase of Government securities was allowable as deduction; (iii) whether disallowance of a small depreciation claim required interference; and (iv) whether the levy of interest under sections 234A and 234B could be sustained.

Issue (i): whether estimated accrued interest on non-performing assets was taxable in the assessee-bank's hands.

Analysis: The assessee consistently recognised interest on NPAs on receipt basis. The issue was covered by earlier Tribunal decisions holding that interest on sticky advances/NPA advances does not accrue for tax purposes in such circumstances. The decision proceeded on the principle that, for banking income of this nature, real income alone is taxable and not a merely notional accrual. The Tribunal followed the binding coordinate Bench view and accepted the assessee's method of recognition.

Conclusion: The addition made on account of estimated accrued interest on NPAs was deleted, in favour of the assessee.

Issue (ii): whether amortisation of premium paid on purchase of Government securities was allowable as deduction.

Analysis: The claim related to premium paid on securities classified in the banking investment portfolio. The Tribunal followed its earlier view that, where the premium is amortised over the remaining period to maturity in accordance with banking prudential norms, the expenditure is allowable. The claim was treated as a legitimate revenue adjustment in the banking accounts.

Conclusion: The disallowance of amortisation expenses was deleted, in favour of the assessee.

Issue (iii): whether the disallowance of the depreciation claim required interference.

Analysis: The assessee did not press this ground.

Conclusion: The ground was dismissed as not pressed.

Issue (iv): whether the levy of interest under sections 234A and 234B could be sustained.

Analysis: The levy under section 234B was treated as consequential. As regards section 234A, the Tribunal found that the issue required further verification on facts, particularly whether the return was filed within the statutory time limit under section 139(1). The matter was therefore sent back for fresh consideration.

Conclusion: The levy of interest under section 234B was left to follow the consequential outcome, and the issue under section 234A was remanded to the Assessing Officer.

Final Conclusion: The assessee succeeded on the principal additions relating to NPAs and Government securities, did not press one minor disallowance, and obtained a remand on the section 234A interest issue, resulting in only partial relief overall.

Ratio Decidendi: Interest on NPAs of a bank, when consistently recognised on receipt basis and supported by the applicable banking income principles, is not assessable as accrued income on a notional basis; similarly, amortisation of premium on Government securities held to maturity is allowable where it accords with prudential banking norms.

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