Interest on non-performing assets taxed only on receipt where RBI norms override accrual recognition for uncertain recovery.

Interest on advances classified as non-performing assets was held not taxable on accrual merely because the assessee followed the mercantile system. The Tribunal applied RBI prudential norms and the accounting principle that income cannot be recognised where recovery is uncertain, noting that the bank consistently treated such interest as taxable only on receipt. It also relied on the statutory framework under section 43D and the consistency of the accounting method under section 145. The addition was therefore deleted, and interest on NPAs was brought to tax only on actual receipt.

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Issues: Whether interest on advances classified as non-performing assets was taxable on accrual basis despite the assessee following the mercantile system of accounting, or whether it was taxable only on actual receipt.

Analysis: The assessee, a co-operative bank engaged in banking business, had consistently followed the RBI prudential norms for income recognition and had not treated interest on NPAs as accrued income until receipt. The Tribunal noted that the RBI directions were mandatory for the assessee and that the accounting treatment was consistent with the accounting standards governing uncertainty in recovery of revenue. It also relied on the earlier coordinate bench view that, where assets are classified as NPAs in accordance with RBI directions, interest thereon cannot be treated as accrued merely because the assessee otherwise follows the mercantile system of accounting. The Tribunal further considered that the assessee's claim was supported by the statutory framework under section 43D and the consistency of the method followed under section 145.

Conclusion: The interest on NPAs was not taxable on accrual basis and was to be brought to tax only on actual receipt; the deletion of the addition was upheld.

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