Real income theory governs NPA interest for co-operative banks, making taxation arise only on actual receipt.

Interest on non-performing assets and sticky loans of a co-operative bank was treated as taxable only on receipt basis, because the real income theory and RBI income-recognition directions prevented accrual until actual receipt. The Tribunal noted that RBI norms prevail for co-operative banks under Section 45Q of the RBI Act, and that the assessee's mercantile method and Section 145 of the Income-tax Act did not override those mandatory directions. The applicable accounting standard and prior judicial decisions supported this treatment, so unrealised interest on NPAs was not brought to tax on accrual.

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Issues: Whether interest on non-performing assets or sticky loans of a co-operative bank was taxable on accrual basis or only on receipt basis.

Analysis: The issue was held to be covered by earlier Tribunal and High Court decisions applying the real income theory, accounting standard on revenue recognition, and RBI directions governing income recognition for co-operative banks. It was noticed that, for income recognition, the RBI directions prevail by virtue of Section 45Q of the RBI Act, and that interest on NPA accounts does not accrue as real income until actually received. The Tribunal also noted that the assessee's method of accounting and the mercantile system did not change this position, and that Section 145 of the Income-tax Act does not override the mandatory RBI income-recognition norms in this context.

Conclusion: Interest on sticky loans or NPAs was held taxable only on receipt basis and not on accrual basis, in favour of the assessee.

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