Real income principle bars tax on doubtful NPA interest when RBI norms require receipt-based recognition.

Interest on non-performing asset accounts was treated as not accruing for tax purposes where recovery was doubtful and the income had not been credited to profit and loss account. Although the assessee was not shown to be a scheduled bank and therefore did not fall within the express scope of section 43D, the Tribunal preferred its earlier co-ordinate Bench view that RBI prudential income-recognition norms and the real income principle prevent taxation on mere accrual in such circumstances. In the absence of binding jurisdictional High Court authority, the view favourable to the assessee was adopted and the addition on alleged accrued NPA interest was deleted.

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Issues: Whether interest on non-performing asset accounts, not credited to the profit and loss account, could be brought to tax on accrual basis in the hands of a co-operative bank.

Analysis: The dispute turned on whether the assessee fell within the statutory class covered by section 43D read with the relevant explanation to section 36(1)(viia), and whether RBI income-recognition norms could be ignored for tax purposes. The assessee was not shown to be a scheduled bank and therefore did not fall within the express scope of section 43D. However, on the substantive question of accrual, the Tribunal followed its earlier co-ordinate Bench decisions and preferred the view that interest on NPAs does not accrue as income when recovery is doubtful and RBI prudential norms require recognition only on receipt basis. In the absence of jurisdictional High Court authority and in view of conflicting non-jurisdictional High Court views, the view favourable to the assessee was adopted.

Conclusion: The addition made on account of accrued interest on NPAs was not sustainable and was directed to be deleted.

Ratio Decidendi: Interest on NPA advances does not accrue for taxation where, applying RBI income-recognition norms and the real income principle, recovery is doubtful and no contrary jurisdictional precedent binds the Tribunal.

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