Real income principle excludes NPA overdue interest on accrual, while fund interest and consequential interest liability were upheld.

Overdue interest on non-performing assets was treated as not taxable on accrual basis where a co-operative bank followed the statutory accounting framework and RBI prudential norms; the mere separate reflection of such interest in accounts did not make it real income, so the addition was deleted. Interest earned on the Agricultural Credit Stabilisation Fund remained includible in income because the issue had already been decided against the assessee in earlier years. Interest under section 234B was upheld as mandatory and consequential once statutory conditions were met, leaving the assessee successful only on the NPA interest issue.

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Issues: (i) Whether interest overdue on non-performing assets was taxable on accrual basis and the corresponding addition was sustainable; (ii) whether interest on Agricultural Credit Stabilisation Fund was includible in income; (iii) whether interest under section 234B was leviable.

Issue (i): Whether interest overdue on non-performing assets was taxable on accrual basis and the corresponding addition was sustainable.

Analysis: The assessee, a co-operative bank, was required to prepare its accounts in accordance with the Maharashtra Co-operative Societies Act, 1960 and the Maharashtra Co-operative Societies Rules, 1961, under which overdue interest on loans is separately reflected while computing net profits. The Tribunal followed its earlier decisions in the assessee's own case and noted that RBI prudential norms govern income recognition for NPAs, under which such interest is not recognized as income on accrual basis but only on receipt. The mere presentation of gross interest in the profit and loss account did not alter the true character of the income, especially when the corresponding entries in the balance sheet showed separate disclosure consistent with the applicable statutory framework.

Conclusion: The addition on account of interest overdue on NPAs was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether interest on Agricultural Credit Stabilisation Fund was includible in income.

Analysis: The assessee accepted that this issue had already been decided against it in earlier assessment years. No contrary basis was shown to disturb that position.

Conclusion: The addition on this count was sustained against the assessee.

Issue (iii): Whether interest under section 234B was leviable.

Analysis: Interest under section 234B is mandatory and consequential once the statutory conditions are met.

Conclusion: The levy of interest under section 234B was upheld against the assessee.

Final Conclusion: The assessee succeeded on the core dispute relating to overdue interest on NPAs, while the remaining grounds were rejected, resulting in a partly allowed appeal.

Ratio Decidendi: For a co-operative bank governed by RBI prudential norms and the statutory accounting framework applicable to co-operative societies, overdue interest on NPAs is not taxable on accrual basis merely because it is separately reflected in the accounts; real income, not book presentation alone, governs taxability.

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