Interest on non-performing assets taxable only on receipt when RBI prudential norms apply to a cooperative bank.

For a cooperative bank governed by RBI prudential norms, interest on non-performing assets was held not to accrue as real income on an accrual basis and could be taxed only on actual receipt. The Tribunal applied the real income theory, the method of accounting regularly followed, and the binding effect of RBI income-recognition directions, holding that section 145 of the Income-tax Act did not displace those norms where they operated in their field. Earlier authority, including UCO Bank, was treated as controlling, while State Bank of Travancore did not assist the Revenue. The assessee's receipt-based treatment was upheld and the appeals were dismissed.

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Issues: Whether interest income on non-performing assets was required to be recognised and taxed on accrual basis in the hands of a cooperative bank.

Analysis: The issue was found to be covered by prior Tribunal and High Court decisions holding that, in the case of non-performing assets, interest does not accrue as real income until its actual receipt. The accounting treatment is governed by the real income theory, the method of accounting regularly followed, the binding effect of RBI income-recognition norms, and the principle that, for income recognition, section 145 of the Income-tax Act does not displace the RBI directions where they operate in their field. The Supreme Court decision in State Bank of Travancore was held not to advance the Revenue's case in view of later binding authority, including UCO Bank and subsequent decisions.

Conclusion: Interest on non-performing assets was not required to be taxed on accrual basis and was taxable only on receipt; the Revenue's objections were rejected.

Final Conclusion: The appeals were dismissed, and the assessee's treatment of interest on NPAs on receipt basis was upheld.

Ratio Decidendi: For a bank governed by RBI prudential norms, interest on non-performing assets is not real income on accrual and can be brought to tax only on actual receipt, notwithstanding mercantile accounting.

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