RBI prudential norms override mercantile accrual for NPAs and allow HTM security premium amortization for banks

RBI prudential norms governed income recognition for a cooperative bank, so interest on non-performing assets was not taxable on mercantile accrual basis until realized; the deletion of the accrued-interest addition was upheld. Amortization of premium on government securities held to maturity was also accepted as a permissible business adjustment when made in accordance with RBI norms, so the disallowance was deleted. The Revenue's challenge failed on both issues, and the relief granted by the CIT(A) was sustained.

---

---

Issues: (i) Whether interest accrued on non-performing assets could be taxed on mercantile accrual basis in the hands of a cooperative bank when RBI prudential norms required recognition on cash basis; (ii) whether amortization of premium on government securities held to maturity was allowable as a deduction.

Issue (i): Whether interest accrued on non-performing assets could be taxed on mercantile accrual basis in the hands of a cooperative bank when RBI prudential norms required recognition on cash basis.

Analysis: The assessee was a cooperative bank governed by RBI directions. The Tribunal followed its own earlier decision and the jurisdictional High Court decision holding that RBI prudential norms on income recognition apply to cooperative banks. It was held that interest on sticky advances does not represent real income until realized and that the special treatment under the statutory banking regime prevails over mere mercantile accounting for such NPAs.

Conclusion: The addition on account of accrued interest on NPAs was not sustainable and the deletion by the CIT(A) was upheld, in favour of the assessee.

Issue (ii): Whether amortization of premium on government securities held to maturity was allowable as a deduction.

Analysis: The Tribunal followed the jurisdictional High Court and coordinate bench decisions accepting that, for banking entities, amortization of premium on HTM securities made in accordance with RBI norms is an allowable business adjustment. The expenditure was treated as consistent with the banking regulatory framework and the method of accounting accepted for such securities.

Conclusion: The disallowance of amortization of premium on government securities was rightly deleted, in favour of the assessee.

Final Conclusion: The Revenue's appeals failed in respect of both disputed additions, and the relief granted by the CIT(A) was sustained.

Ratio Decidendi: For a cooperative bank, RBI prudential norms governing recognition of income from NPAs and treatment of premium on held-to-maturity securities override a mere mercantile accrual approach when determining taxable income.

---