NPA interest recognition for co-operative banks follows RBI norms, with taxability deferred until actual receipt under section 43D.

Interest on non-performing assets of a co-operative bank governed by RBI prudential norms is recognised for tax purposes only on actual receipt, not on accrual basis. The text states that RBI income-recognition directions prevail in this field, so accounting treatment alone does not determine taxability where the governing norms defer recognition until receipt. It further notes that section 43D applies to such interest, entitling the bank to exclude it from taxable income until actually received; the contrary Revenue view is described as inapplicable on the stated facts.

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Issues: Whether interest on non-performing assets of a co-operative bank was taxable on accrual basis or could be excluded from income by applying section 43D and the RBI prudential norms.

Analysis: The dispute concerned income recognition on NPA interest in the hands of a co-operative bank governed by Reserve Bank of India guidelines. The Tribunal noted that prior decisions had held that where a co-operative bank operates under RBI prudential norms, interest on NPA does not accrue for tax purposes until actually received. It also relied on the principle that RBI directions on income recognition have overriding effect in the relevant field, and that the accounting treatment cannot by itself determine taxability where the governing norms require recognition only on receipt. The contrary view cited by the Revenue was found inapplicable on the facts.

Conclusion: The interest on NPA was not taxable on accrual basis and the assessee was entitled to the benefit of section 43D. The addition was rightly deleted and the Revenue's challenge failed.

Ratio Decidendi: A co-operative bank governed by RBI prudential norms is entitled to recognize interest on NPAs only on actual receipt for tax purposes, and such interest is not taxable on accrual basis where section 43D applies.

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