NPA interest and bad debt provision rules: accrual taxation fails for unreal income, while section 36(1)(viia) stays book-entry limited.

Interest on non-performing assets is not taxable on accrual when, under RBI prudential norms and the applicable co-operative law, it is shown separately and not recognised as income in substance; a mere book entry does not establish real income, so the addition was deleted. Deduction under section 36(1)(viia) is confined to the provision for bad and doubtful debts actually made in the books for the relevant year; a claim beyond the recorded provision was disallowed. Interest under section 234B remained consequential, leaving the appeal partly allowed.

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Issues: (i) Whether interest relatable to non-performing assets could be taxed on accrual basis when the bank accounted for it in accordance with RBI norms and the governing co-operative law. (ii) Whether deduction under section 36(1)(viia) of the Income-tax Act, 1961 was confined to the amount of provision actually made in the books of account.

Issue (i): Whether interest relatable to non-performing assets could be taxed on accrual basis when the bank accounted for it in accordance with RBI norms and the governing co-operative law.

Analysis: The interest on NPAs was required by the RBI prudential framework to be shown separately and not recognised as income on accrual basis. The annual accounts also reflected the amount as a separate contra entry in compliance with the Maharashtra Co-operative Societies Act, 1960 and the Maharashtra Co-operative Societies Rules, 1961. A book entry by itself did not establish accrual of real income.

Conclusion: The addition on account of interest on NPAs was deleted in favour of the assessee.

Issue (ii): Whether deduction under section 36(1)(viia) of the Income-tax Act, 1961 was confined to the amount of provision actually made in the books of account.

Analysis: The statutory language allowed deduction only in respect of provision for bad and doubtful debts actually made. The assessee had claimed a higher amount than the provision recorded in the accounts, and the issue was covered by the earlier view that the deduction cannot exceed the provision created in the books for the relevant year.

Conclusion: The restriction of the deduction to the amount of provision actually made was upheld against the assessee.

Final Conclusion: The appeal succeeded on the NPA interest issue, failed on the deduction claim under section 36(1)(viia), and the interest charge under section 234B remained consequential, resulting in a partly allowed appeal.

Ratio Decidendi: Interest on NPAs does not accrue as taxable income when, under the applicable regulatory and accounting framework, it is not recognised as income in substance, and deduction for bad and doubtful debts under section 36(1)(viia) is limited to the provision actually created in the books for the relevant year.

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