Real income doctrine for NPA interest: accrual taxation denied where interest had not actually accrued under prudential norms.

Interest on NPA advances was held not to accrue as real income under RBI prudential norms, so it could not be taxed on accrual basis merely because the co-operative bank followed the mercantile system. The Tribunal preferred the assessee-favourable view in the absence of any jurisdictional High Court ruling and in light of divergent non-jurisdictional authorities. It also held that section 145 could not compel taxation of income that had not actually accrued. The addition was therefore deleted and the deletion sustained.

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Issues: Whether interest on non-performing assets was taxable on accrual basis in the hands of the assessee co-operative bank and whether the addition made by the Assessing Officer was sustainable.

Analysis: The assessee was a co-operative bank not covered by section 43D of the Income-tax Act, 1961. The issue was therefore examined on general principles of income recognition. The Tribunal followed its earlier coordinate bench decisions and preferred the view that, in the absence of any jurisdictional High Court ruling and where there were divergent non-jurisdictional High Court decisions, the view favourable to the assessee had to be adopted. It accepted that, in the context of NPA advances governed by RBI prudential norms, interest did not accrue as real income merely because the assessee followed the mercantile system. The Tribunal also relied on the principle that section 145 could not compel taxation of income which had not ically accrued under the applicable income-recognition norms.

Conclusion: The interest on NPAs was not taxable on accrual basis and the deletion of the addition was sustained.

Ratio Decidendi: Where interest on NPA advances has not accrued as real income under RBI prudential norms, it cannot be brought to tax on accrual basis merely by reference to mercantile accounting or section 145 of the Income-tax Act, 1961.

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