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Issues: Whether interest receivable on sticky loans and non-performing assets of a co-operative bank could be brought to tax on accrual basis under the mercantile system of accounting, and whether the assessee was entitled to exclude such interest from taxable income.
Analysis: The assessee, a co-operative bank governed by banking regulations and RBI norms, did not credit the interest on sticky loans and NPAs to the profit and loss account, following the prudential income-recognition principle that such income is recognized only on receipt. The addition was made by the Assessing Officer on the footing that the assessee followed the mercantile system and that section 43D did not apply. The Tribunal noted that the issue was identical to earlier decisions of coordinate Benches, which held that interest on NPAs does not accrue in the relevant sense where recovery itself is doubtful and the RBI-based income recognition method reflects real income. The Tribunal also accepted that, for income recognition, the accounting treatment consistent with RBI directions prevails, and that the interest on such sticky advances cannot be taxed merely because the assessee follows mercantile accounting.
Conclusion: The addition made on account of interest receivable on sticky loans and NPAs was not sustainable, and the assessee succeeded on the issue.
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