1990 (8) TMI 126 - HC - Income Tax

Summary

Issues:
1. Interpretation of taxability of interest income on sticky loans for a nationalized bank following the mercantile system of accounting.
2. Application of circular issued by the Central Board of Direct Taxes regarding taxability of interest on doubtful debts.
3. Justifiability of the Tribunal's decision in refusing to refer the question raised as a question of law.

Analysis:
The judgment pertains to an application under section 256(2) of the Income-tax Act, 1961, involving the taxability of interest income on sticky loans for a nationalized bank following the mercantile system of accounting. The Department raised a question regarding the inclusion of such interest in computing the bank's total income. The Tribunal, relying on a circular issued by the Central Board of Direct Taxes in September 1984, set aside the assessment order and directed a reconsideration based on the circular's instructions. However, the said circular was withdrawn by the Board in February 1986, post the Supreme Court's decision in the State Bank of Travancore case [1986] 158 ITR 102.

The primary issue revolves around whether the interest income on sticky loans had accrued to the bank. The Tribunal did not dispute the accrual of interest but emphasized the binding nature of the circular, necessitating a review of the taxability in light of its provisions. The court noted that the question raised did not directly stem from the Tribunal's order, leading to the conclusion that the Tribunal was justified in refusing to refer the question as a question of law.

Furthermore, the Department proposed reframing the question and referring it for opinion under section 256(2) of the Act. While the court acknowledged its authority to reframe questions to reflect the actual dispute, it highlighted the necessity for the reframed question to align with the Department's intended query. The suggested reframing by the Department's counsel was deemed as proposing an entirely new question beyond the court's purview under section 256(2). Consequently, the rule was discharged, and no costs were awarded in the matter.