NPA interest accrual rules: RBI prudential norms deferred income recognition, so the addition was deleted.

Interest on non-performing assets of a co-operative bank was treated as not accruing as taxable income where RBI prudential norms governed income recognition and the amount had not become real or recoverable during the year. The Tribunal noted that section 43D did not apply in the same manner as to scheduled banks and financial institutions, but followed co-ordinate Bench authority and the view favouring the assessee where non-jurisdictional High Court decisions diverged. The addition for NPA interest was deleted and the Revenue's challenge failed.

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Issues: Whether interest receivable on non-performing assets or sticky loans of a co-operative bank was taxable on accrual basis and whether the assessee could claim the benefit of the treatment applicable to such interest under section 43D.

Analysis: The Tribunal noted that the assessee was a co-operative bank and, on the facts, section 43D was not applicable in the same manner as to scheduled banks and financial institutions. It relied on earlier co-ordinate Bench decisions holding that, for income recognition, RBI prudential norms govern the treatment of interest on NPAs. The Tribunal also followed the view that where there is divergence between non-jurisdictional High Courts, the interpretation favourable to the assessee should be adopted. On that basis, interest on NPAs was held not to have accrued as income during the relevant year.

Conclusion: The deletion of the addition towards interest on NPAs was upheld and the Revenue's challenge failed.

Final Conclusion: Interest on NPAs of the assessee bank was held not taxable for the year under consideration, and the Revenue's appeal was dismissed.

Ratio Decidendi: Interest on non-performing assets does not accrue as taxable income where RBI prudential norms postpone recognition and the income has not become real or recoverable during the year.

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