Non-performing asset interest cannot be taxed on mere accrual where recovery is doubtful; unpaid dividend is not taxable income.

Interest on non-performing assets was held not taxable on mere accrual where recovery of the principal had become doubtful and the income was not recognised under banking prudential norms; the addition was deleted. Long outstanding dividend payable was treated as an appropriation of profits, not taxable income, and the addition was deleted. The claim for deduction relating to a co-operative bank under the bad-debt provision and the claim on interest on investments required verification of facts and was remitted to the lower authority for fresh examination. Overall, the substantive additions on non-performing assets and dividend liability failed, while the remaining issues were restored for inquiry.

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Issues: (i) Whether deduction under section 36(1)(viia) was allowable to the assessee co-operative bank, (ii) whether interest on non-performing assets was taxable on accrual basis, (iii) whether long outstanding dividend payable could be treated as income, and (iv) whether the claim relating to interest on investments required fresh examination.

Issue (i): Whether deduction under section 36(1)(viia) was allowable to the assessee co-operative bank.

Analysis: The claim turned on the assessee's status as a co-operative bank carrying on banking business and on whether the deduction could be allowed only after verifying creation of provision for bad and doubtful debts in the books. The matter also involved the interaction between the banking law regime and the deduction provision.

Conclusion: The issue was remitted to the Assessing Officer for verification and was allowed for statistical purposes.

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

Analysis: The interest was not treated as real income where recovery of the principal itself had become doubtful and the assessee had not brought such interest to its profit and loss account in accordance with banking prudential norms. The settled principle applied was that income cannot be taxed on a mere notional accrual when recovery is uncertain.

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

Issue (iii): Whether long outstanding dividend payable could be treated as income.

Analysis: Dividend was treated as appropriation of profits and not as a charge on the profit and loss account. An unpaid dividend liability, by itself, could not be taxed as income of the assessee.

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

Issue (iv): Whether the claim relating to interest on investments required fresh examination.

Analysis: The factual basis for the claim was found incomplete and required proper verification by the lower authority before a final view could be taken.

Conclusion: The matter was remitted for further verification and was allowed for statistical purposes.

Final Conclusion: The revenue's appeals failed on the substantive issues relating to non-performing assets and dividend liability, while the deduction under section 36(1)(viia) and the interest-on-investments issue were restored for verification, resulting in a partly allowed disposal overall.

Ratio Decidendi: Interest on doubtful advances governed by banking prudential norms cannot be assessed on mere accrual, and unpaid dividend appropriated out of profits cannot be treated as taxable income.

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