Banking income recognition rules: NPA interest, bad debt provisions, and amortisation of held-to-maturity security premium

A co-operative bank article notes that deduction for bad and doubtful debts under section 36(1)(viia) is confined to the provision actually created in the books. It also states that, for a co-operative bank not covered by section 43D, interest on non-performing assets does not accrue where recovery is doubtful and RBI prudential norms defer recognition, so such income is not taxed on accrual basis. The text further records that premium paid on Government securities held to maturity may be amortized over the remaining period to maturity and allowed as revenue expenditure.

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Issues: (i) Whether the deduction under section 36(1)(viia) of the Income-tax Act, 1961 was confined to the provision actually made in the books of account for bad and doubtful debts; (ii) whether interest relatable to non-performing assets was taxable on accrual basis in the hands of the co-operative bank; and (iii) whether amortization of premium paid on Government securities held to maturity was allowable as a deduction.

Issue (i): Whether the deduction under section 36(1)(viia) of the Income-tax Act, 1961 was confined to the provision actually made in the books of account for bad and doubtful debts.

Analysis: The deduction under section 36(1)(viia) is expressed to be in respect of any provision for bad and doubtful debts made by an eligible bank. The provision in the statute was read as requiring the assessee to create the relevant provision in its books, and the Tribunal followed its own earlier decision in the assessee's case as well as the view that the deduction cannot exceed the provision actually recorded.

Conclusion: The deduction was correctly restricted to the amount of provision actually made in the books of account, and the assessee failed on this issue.

Issue (ii): Whether interest relatable to non-performing assets was taxable on accrual basis in the hands of the co-operative bank.

Analysis: The assessee followed RBI prudential norms and did not recognise interest on NPA advances. Section 43D was not applicable to the assessee, so the question turned on ordinary principles of accrual. Applying the view that income does not accrue when recovery itself is doubtful and following the favourable non-jurisdictional precedent, the interest on NPA advances was treated as not having accrued during the year.

Conclusion: The addition of interest on NPAs was rightly deleted, and the Revenue failed on this issue.

Issue (iii): Whether amortization of premium paid on Government securities held to maturity was allowable as a deduction.

Analysis: The premium represented the excess cost over face value of securities classified under the held-to-maturity category. The claim was accepted as consistent with RBI guidelines and with the view already taken by coordinate benches that such premium is to be amortized over the remaining period to maturity and allowed as revenue expenditure.

Conclusion: The deduction for amortization of premium on Government securities was correctly allowed, and the Revenue failed on this issue.

Final Conclusion: The assessee's appeal and the Revenue's appeal were both rejected, resulting in partial success for the assessee on the substantive tax issues arising in the cross-appeals.

Ratio Decidendi: For a co-operative bank not covered by section 43D, interest on NPA advances does not accrue where recovery is doubtful and RBI prudential norms postpone recognition; and a deduction under section 36(1)(viia) is limited to the provision actually created in the books.

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