1999 (6) TMI 4 - HC - Income Tax

Income Accrual Of Income Method Of Accounting Entertainment Expenditure Interest On Sticky Loans Business Expenditure

Summary

Issues:
1. Taxability of interest on sticky loans for banks under the Income-tax Act, 1961.
2. Applicability and withdrawal of circulars issued by the Central Board of Direct Taxes regarding interest on doubtful debts.
3. Interpretation of circulars issued in 1978 and 1984 regarding taxation of interest on doubtful debts by banking companies.
4. The power of the Central Board of Direct Taxes under section 119 of the Income-tax Act.

Issue 1: Taxability of interest on sticky loans for banks under the Income-tax Act, 1961:
The judgment addresses the principal question of whether interest on sticky loans for banks is taxable under the Income-tax Act, 1961. The court refers to historical circulars issued by the Central Board, dating back to 1924, exempting interest on loans entered in a suspense account from being included in the taxable income if recovery was deemed practically impossible. The circulars were modified over the years, with the 1984 circular subjecting interest on doubtful debts to tax after three consecutive years of no recovery, with only actual recoveries being taxable in subsequent years.

Issue 2: Applicability and withdrawal of circulars issued by the Central Board of Direct Taxes:
The judgment discusses circulars issued by the Central Board in 1952, 1978, and 1984 regarding the tax treatment of interest on doubtful debts for banks. The 1952 circular exempted such interest from taxation if recovery was unlikely. However, objections from Revenue audit and judicial decisions led to the withdrawal and modification of these circulars over time, ultimately subjecting such interest to tax under certain conditions.

Issue 3: Interpretation of circulars issued in 1978 and 1984 regarding taxation of interest on doubtful debts by banking companies:
The court analyzes the implications of circulars issued in 1978 and 1984 concerning the taxation of interest on doubtful debts by banking companies. The 1984 circular introduced a system where interest on sticky loans would be taxable after a certain period of no recovery, aligning with the mercantile system of accounting. The court emphasizes the importance of following the circulars in assessing the taxable income of banks, especially concerning interest on doubtful loans.

Issue 4: The power of the Central Board of Direct Taxes under section 119 of the Income-tax Act:
The judgment highlights the authority of the Central Board under section 119 to issue circulars for the benefit of the assessee, toning down the rigour of the law in certain situations. These circulars are deemed binding on the authorities administering the Act and must be applied to eligible assessees. The court emphasizes that the circulars in force must be followed for assessing taxable income, with specific rules outlined for the treatment of interest on sticky loans by banks.

In conclusion, the judgment clarifies the tax treatment of interest on sticky loans for banks under the Income-tax Act, emphasizing the significance of circulars issued by the Central Board and the adherence to these guidelines in assessing taxable income.