Real income principle prevents tax on uncertain NPA interest where RBI prudential norms defer recognition

Interest on non-performing asset advances was not taxable on accrual where recovery remained uncertain and the co-operative bank had followed RBI prudential norms. The Tribunal applied the real income principle and held that, in the absence of binding jurisdictional High Court authority, the view favourable to the assessee should prevail. As the interest had not actually accrued during the year, the Revenue's addition was not sustainable and the appeal failed.

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Issues: Whether interest income relatable to non-performing asset advances could be brought to tax on accrual basis in the hands of a co-operative bank following RBI prudential norms, and whether the Revenue's addition was sustainable.

Analysis: The assessee, a co-operative bank not covered by section 43D of the Income-tax Act, 1961, had not recognized interest on NPA advances in accordance with RBI prudential norms. The dispute turned on whether such interest had actually accrued during the relevant year. In the absence of jurisdictional High Court authority, the Tribunal followed the view favourable to the assessee, noting the divergence between non-jurisdictional High Court decisions and applying the principle that interest on doubtful NPA advances does not accrue where recovery itself is uncertain. The Tribunal also noted that RBI directions govern income recognition, and that the real income principle applies to such interest.

Conclusion: The addition made on account of interest on NPA advances was not sustainable and the Revenue's appeal failed.

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