NPA interest accrual and real income principle kept unrecognised interest outside taxable income for a co-operative bank.

Interest on non-performing asset advances was held not to accrue where, under RBI prudential norms, it was not recognised in the accounts and recovery of principal had itself become doubtful. As the co-operative bank was not covered by section 43D, the issue turned on general accrual principles and real income theory; the Tribunal followed its earlier coordinate bench view and preferred the interpretation favourable to the assessee amid conflicting non-jurisdictional High Court rulings. The addition was deleted and the interest was not taxable on accrual basis.

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Issues: Whether interest income on non-performing assets, not recognised in accounts following RBI prudential norms, accrued to a co-operative bank and was taxable on accrual basis.

Analysis: The assessee was not covered by section 43D of the Income-tax Act, 1961. The dispute was therefore governed by general principles of accrual and revenue recognition. The Tribunal relied on the view that RBI prudential norms on income recognition apply to banking entities and that, where recovery of principal itself had become doubtful, interest on NPAs cannot be treated as real income that has accrued. It followed the earlier coordinate bench decision on an identical issue and preferred the view favourable to the assessee in the presence of conflicting non-jurisdictional High Court decisions.

Conclusion: Interest income on NPA advances did not accrue to the assessee and was not taxable on accrual basis; the addition was correctly deleted.

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