Interest on NPA accounts of a co-operative bank is taxable only on receipt basis, not accrual, under RBI income-recognition norms.

Interest on non-performing asset accounts of a co-operative bank is not taxable on accrual merely because the bank follows mercantile accounting, where RBI income-recognition norms apply. By virtue of section 45Q of the Reserve Bank of India Act, 1934, those directions override contrary accounting treatment, so interest on NPAs shown in the balance sheet but not credited to the profit and loss account is assessable only on receipt basis. The ITAT Chennai held that the addition of accrued NPA interest was unsustainable and directed its deletion.

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Issues: Whether interest accrued on non-performing asset accounts of a co-operative bank, shown in the balance sheet but not credited to the profit and loss account, could be brought to tax on accrual basis.

Analysis: The assessee was a co-operative bank governed by Reserve Bank of India norms. The disputed amounts represented interest on NPA accounts, which had not been credited to the profit and loss account and were shown by way of disclosure in the financial statements. The ruling proceeded on the principle that section 45Q of the Reserve Bank of India Act, 1934 gives overriding effect to RBI directions on income recognition. On that basis, accrued interest on NPAs is not to be treated as taxable income on accrual merely because the assessee follows mercantile accounting. The earlier addition confirmed by the appellate authority was therefore inconsistent with the settled position that such income is assessable only on receipt.

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

Ratio Decidendi: For a co-operative bank, RBI directions on income recognition prevail by virtue of section 45Q of the Reserve Bank of India Act, 1934, and interest on NPAs is taxable only on receipt basis and not on accrual basis.

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