NPA Interest Taxation: RBI prudential norms prevail, and uncertain recovery prevents accrual-based tax recognition.

Interest on non-performing asset accounts is not recognised as taxable income on accrual where recovery is uncertain, because RBI prudential norms govern income recognition under section 45Q of the Reserve Bank of India Act. The CBDT circular on hardship relief continues to operate and is not displaced merely because section 43D of the Income-tax Act gives a specific benefit to another class of assessees. In this framework, a co-operative bank is treated within the banking-company framework for the purpose of recognising NPA interest, and such interest does not, in substance, accrue for tax purposes.

---

---

Issues: Whether interest on non-performing asset accounts was taxable on accrual basis and whether the Assessing Officer was bound to follow RBI prudential norms and the CBDT circular while computing such income.

Analysis: The appeal concerned addition of interest on NPA accounts. The governing principle applied was that income recognition and tax computation are distinct, and for income recognition the RBI directions prevail by virtue of section 45Q of the Reserve Bank of India Act. The Court followed the jurisdictional High Court view that interest on NPAs cannot be brought to tax where recovery is uncertain and the income has not, in substance, accrued. It also held that the CBDT circular issued to mitigate hardship continues to operate and is not overridden merely because section 43D of the Income-tax Act, 1961 gives a statutory benefit to a different class of assessees. The assessee, being a co-operative bank, was treated as falling within the banking company framework for this purpose, and the contrary view taken by the lower authorities was not sustainable.

Conclusion: The addition of interest on NPA accounts was not sustainable and had to be deleted.

Final Conclusion: The appeal succeeded and the assessee obtained relief on the taxability of interest credited on NPA accounts.

Ratio Decidendi: For income recognition of NPA interest, RBI prudential norms prevail and, where recovery is uncertain, such interest does not accrue as taxable income notwithstanding mercantile accounting or the limited scope of section 43D of the Income-tax Act, 1961.

---