Receipt-based taxation of sticky loan interest applies where RBI norms and real income theory govern income recognition.

Interest on non-performing assets or sticky loans of a co-operative bank is recognised only on receipt basis, because such interest does not amount to real income until actually received. The analysis relies on the real income theory, Accounting Standard 9, RBI income-recognition directions, and section 45Q of the Reserve Bank of India Act, 1934, which prevails over inconsistent recognition treatment. Section 145 of the Income-tax Act does not alter this position for such doubtful interest income. The result is that interest on NPA or sticky loans is taxable only in the year of receipt, not on accrual basis.

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Issues: Whether interest on non-performing assets or sticky loans of a co-operative bank is taxable on accrual basis or only on receipt basis.

Analysis: The issue was held to be governed by the settled position that interest on doubtful or sticky loans does not accrue as real income until actual receipt. The authorities relied on the real income theory, Accounting Standard 9, the Reserve Bank of India directions on income recognition, and section 45Q of the Reserve Bank of India Act, 1934, which gives overriding effect to the RBI norms on income recognition. It was also noted that section 145 of the Income-tax Act, 1961 does not displace this position for income recognition in such cases, and that earlier decisions had consistently treated such interest as taxable only in the year of receipt.

Conclusion: Interest on non-performing assets or sticky loans was taxable only on receipt basis and not on accrual basis, and the Revenue's challenge failed.

Ratio Decidendi: For a co-operative bank, interest on non-performing assets does not accrue as taxable income on the mercantile system where RBI income-recognition norms require receipt-based recognition and the real income theory applies.

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