NPA interest taxation turned on RBI receipt-based recognition, not mercantile accrual, for a cooperative bank.

Interest on non-performing assets for a cooperative bank was not taxable on accrual basis where RBI prudential norms required recognition on receipt basis. Applying the real income theory, the Tribunal held that section 45Q of the Reserve Bank of India Act, 1934 gives overriding effect to RBI directions on income recognition, and the mere adoption of the mercantile system did not make such interest accrue as real income. Section 145 of the Income-tax Act, 1961 governs computation, but it does not displace the mandatory bank-specific recognition regime. The addition for accrued NPA interest was therefore deleted.

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Issues: Whether interest accrued on non-performing assets was taxable on accrual basis where the assessee, a cooperative bank, accounted for such interest on receipt basis in view of RBI directions.

Analysis: The issue had already been settled in the assessee's own case and in other binding decisions applying the real income theory. For income recognition, the RBI prudential norms under section 45Q of the Reserve Bank of India Act, 1934 override the general accounting treatment, and interest on NPA accounts does not accrue as real income merely because the assessee follows the mercantile system. Section 145 of the Income-tax Act, 1961 governs computation of income, but it does not displace the mandatory income-recognition regime applicable to banks and cooperative banks. The earlier judicial view that such interest is taxable only on receipt was therefore followed.

Conclusion: The addition on account of interest on NPA on accrual basis was rightly deleted and the Revenue's challenge failed.

Ratio Decidendi: For cooperative banks, interest on non-performing assets is not taxable on accrual basis where RBI directions require recognition on receipt basis, since income recognition is governed by the overriding prudential norms and the real income principle.

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