Banking tax treatment: amortised security premium and NPA interest follow real income principles, while RBI-linked provisions need statutory allowance.

In banking taxation, amortisation of premium on held-to-maturity government securities was accepted as allowable business expenditure where spread over the remaining term to maturity, following RBI prudential norms and prior judicial authority. Interest on non-performing assets was not taxed on accrual basis because no real income accrued where recovery was doubtful, and RBI guidelines governed recognition of such interest. By contrast, a provision for standard assets made under RBI guidelines was not deductible because allowance must satisfy the Income-tax Act itself; regulatory treatment alone was insufficient. The result was partial relief on the first two issues, with the standard assets claim rejected.

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Issues: (i) whether amortisation of premium on Held to Maturity government securities was allowable as deduction; (ii) whether interest on non-performing assets could be brought to tax on accrual basis; and (iii) whether provision for standard assets made in accordance with RBI guidelines was deductible.

Issue (i): whether amortisation of premium on Held to Maturity government securities was allowable as deduction.

Analysis: The claim was examined in the context of banking prudential norms and the CBDT's guidance for banks. The Tribunal followed the earlier coordinate bench decision and the Bombay High Court ruling accepting that premium paid over face value of securities held to maturity, when amortised over the remaining period till maturity, is an allowable business expenditure. The treatment prescribed by RBI guidelines was treated as relevant for income recognition in the banking context.

Conclusion: The issue was decided in favour of the assessee and the disallowance was deleted.

Issue (ii): whether interest on non-performing assets could be brought to tax on accrual basis.

Analysis: The Tribunal applied the principle that income does not accrue where realisation is doubtful, relying on prior coordinate bench rulings and the Delhi High Court view that interest relatable to NPA advances does not accrue for tax purposes. The Tribunal preferred the view favourable to the assessee in the absence of jurisdictional High Court authority to the contrary and accepted that RBI prudential norms governed recognition of such interest.

Conclusion: The issue was decided in favour of the assessee and the addition was deleted.

Issue (iii): whether provision for standard assets made in accordance with RBI guidelines was deductible.

Analysis: The Tribunal noted that the claim was covered against the assessee by earlier precedent applying the Supreme Court's ruling that a deduction must satisfy the Income-tax Act and cannot be allowed merely because it is provided for under RBI guidelines. The expenditure was therefore held not to be allowable.

Conclusion: The issue was decided against the assessee and the disallowance was sustained.

Final Conclusion: The appeal succeeded only on the first two substantive grounds, while the claim relating to standard assets failed, resulting in partial relief to the assessee.

Ratio Decidendi: In banking cases, amortised premium on held-to-maturity securities and interest on NPAs are governed by real income principles and RBI prudential norms for recognition, but a provision remains deductible only if it is allowable under the Income-tax Act.

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