Interest on NPAs and real income theory prevent accrual taxation for a co-operative bank under RBI income-recognition norms.

For a co-operative bank, interest on loans classified as non-performing assets is not taxable on accrual basis where RBI prudential norms govern income recognition and the real income theory applies. The Tribunal accepted that, despite section 43D of the Income-tax Act, income from NPAs must be recognised only when actually received if no real income has accrued. Relying on binding judicial precedent and noting the absence of any contrary decision, it held that the addition for accrued interest on NPAs was not justified and the disallowance was deleted.

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Issues: Whether interest on non-performing assets of a co-operative bank is taxable on accrual basis under section 43D of the Income-tax Act, 1961, or only on actual receipt in view of RBI guidelines and the real income theory.

Analysis: The assessee was a co-operative bank and the disputed amount represented interest on loans classified as NPAs. The Tribunal noted that the assessee followed RBI-guided prudential norms and that interest on NPAs was not recognised as income on accrual basis. It accepted the view that income recognition has to follow the real income theory and that the revenue could not point to any contrary decision. The Tribunal also followed binding judicial precedent holding that, notwithstanding section 43D, RBI guidelines governing income recognition must be respected for NPAs.

Conclusion: The addition towards accrued interest on NPAs was not justified and was directed to be deleted, in favour of the assessee.

Final Conclusion: Interest on NPAs of the assessee-bank was held not taxable on accrual basis in the facts of the case, and the disallowance was set aside.

Ratio Decidendi: For a co-operative bank bound by RBI income-recognition norms, interest on NPAs is not brought to tax on accrual basis where no real income has accrued.

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