Real income principle governs interest on sticky loans of co-operative banks; taxation follows receipt, not accrual.

Interest on sticky loans or non-performing assets of a co-operative bank following the mercantile system is taxable only on receipt, because doubtful income is governed by the real income principle and RBI norms for recognition. The Tribunal followed earlier coordinate bench rulings on identical facts, noted that no contrary High Court or Supreme Court authority was shown, and held that mercantile accounting alone does not require accrual taxation where recovery is uncertain. The addition made on accrual basis was therefore deleted and the assessee's position was sustained.

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Issues: Whether interest on sticky loans or non-performing assets, in the case of a co-operative bank following the mercantile system of accounting, was taxable on accrual basis or only on receipt basis.

Analysis: The addition made by the Assessing Officer was deleted by the first appellate authority following binding coordinate bench decisions on identical facts. The Tribunal noted that the issue had already been settled in favour of co-operative banks by earlier decisions holding that interest on sticky loans or NPAs does not constitute real income on accrual where recovery is doubtful and recognition is governed by RBI norms. The Tribunal also noted that no contrary authority from any High Court or the Supreme Court was brought to its notice, and that the mercantile system by itself did not compel taxation on accrual in such circumstances.

Conclusion: The interest on sticky loans or NPAs was held taxable on receipt basis, not on accrual basis, and the deletion of the addition was upheld in favour of the assessee.

Ratio Decidendi: For a co-operative bank, interest on sticky loans or NPAs is taxable only when actually received, because income recognition follows the real income principle and the applicable RBI directions override accrual-based recognition for such doubtful income.

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