Real income principle excludes NPA interest from accrual taxation, while HTM premium amortisation was allowed on identical facts.

ITAT Pune held that deduction for provision for bad and doubtful debts under section 36(1)(viia) was not allowable in the manner claimed by the co-operative bank without rural branches, as the clause was applied as a composite provision under binding precedent. It further held that interest on non-performing asset accounts did not accrue for tax purposes where RBI prudential norms deferred recognition until receipt, so the amount was not taxable on accrual basis. The tribunal also allowed amortisation of premium on Government securities held in the HTM category, following the assessee's own earlier year decision on identical facts. The appeal therefore succeeded only in part.

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Issues: (i) Whether deduction for provision for bad and doubtful debts under section 36(1)(viia) of the Income-tax Act, 1961 was allowable to a co-operative bank having no rural branches; (ii) Whether interest on non-performing asset accounts was taxable on accrual basis; (iii) Whether amortization of premium on Government securities held under HTM category was allowable as a deduction.

Issue (i): Whether deduction for provision for bad and doubtful debts under section 36(1)(viia) of the Income-tax Act, 1961 was allowable to a co-operative bank having no rural branches.

Analysis: The provision under clause (viia) was read as comprising distinct limbs, but the statutory text and binding precedent treated the clause as a single composite deduction provision. The Court applied the Supreme Court's interpretation that sections 36(1)(vii) and 36(1)(viia) operate in distinct fields, while the allowance under clause (viia) is governed by its own limits and structure. The assessee's attempt to confine the clause to only one limb was rejected.

Conclusion: The claim under section 36(1)(viia) was not allowable in the manner contended by the assessee; this issue was decided against the assessee.

Issue (ii): Whether interest on non-performing asset accounts was taxable on accrual basis.

Analysis: The assessee followed the RBI prudential norms and credited interest on NPA accounts to a reserve account until actual receipt. In the absence of a jurisdictional High Court ruling, the Court followed the favourable view adopted in earlier co-ordinate bench decisions and applied the real income principle. Interest that had not effectively accrued on NPA accounts was not brought to tax merely on mercantile accounting considerations.

Conclusion: Interest on NPA accounts was held not taxable on accrual basis; this issue was decided in favour of the assessee.

Issue (iii): Whether amortization of premium on Government securities held under HTM category was allowable as a deduction.

Analysis: The issue had already been decided in the assessee's own case for an earlier assessment year on identical facts, and no distinguishing change in circumstances was shown. The earlier view allowing the deduction was followed.

Conclusion: The disallowance was deleted and this issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded only in part, with relief granted on the NPA interest and HTM premium issues, while the claim under section 36(1)(viia) was not accepted in the assessee's favour.

Ratio Decidendi: Interest on non-performing asset accounts does not accrue for tax purposes where RBI prudential norms postpone recognition, and earlier co-ordinate bench rulings are to be followed in the absence of a contrary jurisdictional precedent.

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