NPA interest income cannot be taxed on accrual where recovery is doubtful and RBI income-recognition norms apply.

Interest income on non-performing assets was not taxable on accrual basis where recovery was doubtful, and RBI prudential norms on income recognition prevailed over mere mercantile accounting. As section 43D did not apply to the co-operative bank, the Tribunal held that interest on NPA advances could not be treated as accrued income simply because the books were maintained on an accrual basis. Following the view favourable to the assessee amid divergent non-jurisdictional decisions, the addition of NPA interest was deleted.

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Issues: Whether interest income relatable to non-performing assets, in the case of a co-operative bank not covered by section 43D, could be brought to tax on accrual basis despite RBI prudential norms.

Analysis: The dispute turned on the principle of accrual of income and the effect of RBI prudential norms governing income recognition. Section 43D was not applicable to the assessee, a co-operative bank not falling within the specified category of scheduled banks. The Tribunal followed the view that, in the absence of jurisdictional authority and in the face of divergent non-jurisdictional decisions, the view favourable to the assessee should prevail. It relied on the principle that interest on NPA advances does not accrue where recovery itself is doubtful, and therefore the revenue cannot be recognized as accrued income merely because mercantile accounting is followed. The Tribunal also noted that RBI directions on income recognition have overriding force in the matter of recognizing such income.

Conclusion: The addition of interest income on NPAs was rightly deleted and the issue was decided in favour of the assessee.

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