Taxation of NPA interest on accrual barred where RBI income-recognition norms and CBDT circular continue to apply.

Interest on non-performing assets was held not taxable on accrual where RBI income-recognition norms governed the bank's accounting, and the CBDT circular on interest not received for the prescribed period remained applicable. The reasoning treated RBI directions on income recognition as having overriding effect under the banking framework, and accepted that a co-operative bank fell within the relevant banking law expression. Section 43D was not read as displacing the circular for all assessees, because its statutory benefit was confined to specified categories. On that basis, interest on NPAs could not be brought to tax and the addition was deleted.

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Issues: Whether interest on non-performing assets was taxable in the hands of the assessee bank notwithstanding the RBI income-recognition norms and the CBDT circular.

Analysis: The issue was held to be covered by binding jurisdictional precedent. The reasoning accepted that RBI directions governing income recognition have overriding effect under the Reserve Bank of India Act, and that a co-operative bank falls within the expression banking company for the relevant banking law framework. It was further held that the CBDT circular on interest not received for the prescribed period continued to operate and was not displaced merely because section 43D of the Income-tax Act provides a statutory benefit to certain categories of assessees. On that basis, interest on NPAs could not be brought to tax on accrual.

Conclusion: The addition on account of interest on non-performing assets was unsustainable and was directed to be deleted, in favour of the assessee.

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